Final report of investigation, Case 20062692 |
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Arizona Ombudsman-Citizens' Aide Final Report of Investigation Case # 20062692 Registrar of Contractors December 12, 2008 Arizona Ombudsman/Citizens' Aide 3737 N. 7th Street, Suite 209 Phoenix, Arizona 85014 (602) 277-7292 (800) 872-2879 December 12, 2008 Hon. Bob Burns Senate President Designee 1700 W. Washington, Rm. 204 Phoenix, AZ 85007 Dear Senator Burns: Enclosed is a copy of the report of our investigation of case number 20062692, regarding the Registrar of Contractors (ROC). Nine homeowners contacted us to complain about the ROC system as it related to their Recovery Fund cases against a licensed contractor. The complainants alleged the Registrar of Contractors processed the complicated Recovery Fund complaints in an untimely manner. We substantiated the allegation and made 63 findings. Our investigation indicates that process has overwhelmed purpose at the Registrar's Office. The ROC system harms both homeowners and contractors. The State can and should do a better job by homeowners while still protecting contractors with fair and proper due process systems. Our 68 recommendations would help accomplish that goal. Thirty-six of the recommendations require legislative action. We request the Legislature consider addressing the problems we identify in the enclosed report. I hope you find this report useful. If you have any questions or comments, please do not hesitate to call me at 602-285-9136 Ext 26. I would welcome the opportunity to sit down with you to discuss the report in more detail. Sincerely, Enclosure TABLE OF CONTENTS Executive Summary Report - 17 Issues: Allegation, Introduction and Background Issue 1: Does the Recovery Fund system take too long? Issue 2: Recovery Fund Requirements - - Are the Fund's limits set too low or are other Fund requirements too onerous? Issue 3: Is the Registrar's overall process reasonable or is it too complicated? Issue 4: Are there appropriate triggers for the summary suspension of a contractor's license (as referenced in A. R. S. §41-1 092.11)? Issue 5: Can problem contractors "game the system" and avoid discipline? Issue 6: Are surety bond amounts set appropriately? Issue 7: Are monetary penalties appropriately applied against contractors found to be in violation of statutes? Issue 8: The difficult two-pronged legal and factual question: (A) When can a homeowner employ a new contractor to fix a problem? (B) When can a homeowner deny access to the original contactor? Issue 9: Contractors frequently operate as a limited liability company (LLC). What omissions in A. R. S., Title 32, relate to contractors operating as limited liability company entities? Issue 10: What is the enforcement process the Registrar of Contractor follows to ensure compliance with A.R.S. §§32-1122(B)(1)(i) and 32-1154 (A)(4) relating to workman compensation laws? Issue 11: What is the enforcement process the Registrar of Contractors follows to ensure compliance with A. R. S. §32-1154 (A)(4) governing unemployment insurance laws? Issue 12: What is the enforcement process the Registrar of Contractors follows to ensure compliance with A. R. S. §32-1154 (A)(4) governing social security? Issue 13: What is the enforcement process the Registrar of Contractors follows to ensure compliance with A.R.S. §32-1154 (A)(5) governing income taxes or any tax imposed by title 42, chapter 5, articles 1 and 4 and incurred in the operation of the licensed business. Issue 14: To what extent does the Registrar of Contractor's Office check contractor backgrounds? I -XXI page 1 page 6 page 14 page 23 page 32 page 37 page 42 page 48 page 53 page 60 page 63 page 66 page 68 page 69 page 71 Issue 15: What is the scope ofdiscipline affecting a contractor's remaining licenses once he has one license suspended or revoked? Issue 16: To what degree are general contractors required to verify whether a sub-contractor has a license in good standing with the Registrar ofContractors? Issue 17: Is it proper for the Registrar to encourage complainants to pursue cases on their own without the benefit oflegal counsel? Conclusions Agency Response page 75 page 78 page 79 page 82 LIST OF ATTACHMENTS: Exhibit A-- -Timetable A - Administrative Process to the Recovery Fund -Administrative Process Described Exhibit B -- -Timetable B - Civil Court Process to the Recovery Fund -Civil Court Process to the Recovery Fund Described Exhibit C -- Flow Chart of Process (without complications) Exhibit D -- Legal memo relating to summary suspension Exhibit E -- 2003 Auditor General Report Recommendation Exhibit F -- Bond Limits and Regulations Exhibit G -- List of the 31 States with Licensing Boards for Contractors Exhibit H -- Residential Contracting by State Exhibit I -- NASCLA states Recovery Fund Features Summary and Overview Exhibit J -- Complaint Forms, Instructions & Brochures Exhibit K -- ROC Recovery Fund Forms and Instructions Exhibit L -- Office of Administrative Hearings Information Exhibit M -- Press Clippings about Similar ROC Cases Exhibit N-Exhibit O-~ Exhibit P -Exhibit Q-Exhibit R-Exhibit S -Exhibit T-- ROC web site information regarding subject contractor ROC Contractor Brochure ROC Customer Survey Charts and Grids Office ofAdministrative Hearing Survey about Legal Representation Summary ofRecommendations References ii Executive Summary Ombudsman - Citizen's Aide Investigation of the Registrar of Contractors Executive Summary Ombudsman - Citizen's Aide Investigation ofthe Registrar of Contractors "The agency's mission is to promote quality construction by Arizona contractors through a licensing and regulatory system designed to protect the health, safety and welfare ofthe public. " Registrar ofContractors The Registrar's Office received grievances filed against a dual-licensed contractor who was accused by 25 families of wrongdoing. Nine of these families subsequently complained about the Registrar of Contractor's process to the State Ombudsman Office. The owners complained the Registrar's Office was too passive and not living up to its stated mission. The Office of the Ombudsman Citizen - Aide then conducted an investigation of the Registrar of Contractors pursuant to A.R.S. §41-1376 et seq. Essentially, we examined how well the Registrar was delivering on its mission promise. Some of the complainant homeowners initially filed with the Registrar's Office, others with the Superior Court and some filed at both locations. Each owner desired financial recovery via the Residential Recovery Fund. Access to the Recovery Fund is dictated by statutory constraints and controlled by the Registrar's Office. Homeowners in both the administrative and the civil court processes felt the Registrar of Contractors Office seemed indifferent about the length of time and difficulty of their process. Owners and contractors both complain to the Ombudsman Office that the Registrar's Office process takes too long. The contractor in this case had 25 complaints filed against him stemming from contracts dating from 2005 and 2006. After about two years, these complaint cases had gone through most of the system and were closed. Twenty-three of the complaints resulted in discipline while two complaints settled or withdrew. Nine homeowners recovered money from the Recovery Fund to compensate or partially compensate them for their loss. Yet, seven deserving homeowners, with a total of $96,515 in unrecoverable awards, went away empty-handed despite proving the contractor's guilt because the Recovery Fund limit of $200,000 was reached. Consistently the vast majorities of contractors' licenses (slightly over 90%) are highly regarded and are not involved in the complaint process. These licensees pride themselves on quality workmanship and good customer service. Regrettably, there are a still a significant number of contractors who receive a complaint. The Registrar of Contractors received 11,867 complaints in FY07 against 5,679 different licensees. In FY06, 11,974 complaints were received. About one-third of the complaints coming into the ROC are serious complaints requiring adjudication. Most of these serious complainants seek reparation from the Recovery Fund. The remaining two-thirds of the complaints are addressed relatively quickly because they are less complex. Typically, less complex complaints are fixed or resolved prior to hearings, not substantiated by the ROC, or the homeowner declines to continue. We focused our attention on the more involved complaints where complainants must avail themselves of the Registrar's full process in order to obtain Recovery Fund reparation. We looked at the Registrar's systems and identified 17 issues. The 68 reforms we are recommending intend to help both homeowners and contractors by reducing the untimely nature of the Registrar's complaint system and by clarifying vague areas of contractor regulation and homeowner responsibility. The recommended reforms also focus the attention and discipline of the Registrar's Office on the worst transgressors amongst contractors because these problem contractors give good contractors a bad name and because they are most likely to harm the public in a substantial way. Lastly, some reforms concentrate on inconsistently pursued aspects ofthe Registrar's regulatory mission. ISSUE 1- DOES THE RECOVERY FUND SYSTEM TAKE TOO LONG? See pages 6-14. The process from complaint to Recovery"Fund-payment-day usually takes well over a year. This is too long. There are two paths to the Recovery Fund. One is through the ROC and the Office of Administrative Hearings and is called the Administrative Process. The other process goes through both the Civil Court and the ROC Recovery Fund. We found: • There are 65 typical components in the Administrative Process. This translates numerically into a 43-step process, which can take 545 days even if no judicial reviews or other appeals are required. The most time-consuming aspect of the system is the hearing process. Administrative cases usually require two hearings. One hearing determines responsibility while the other determines the actual Recovery Fund amount. • There are 33 components in the Civil Court Process leading to the Recovery Fund. This translates numerically into a 29-step process generally involving approximately 123 days of interaction with the Registrar of Contractors Office, after the case is won in court. Just starting the post-court segment of the process is complicated. Prevailing homeowners must bring their original judgment to the ROC from the Court. Homeowners must then file a twenty-day notice with the ROC to say they are going back to court to ask for damage and payment orders from the judge. Again, with this system, each of the parties and the Registrar's Office must labor through two hearings. • The ROC complaint process tends to take between one and two years until final penalties are ordered, so bad contractors can continue to accumulate contracts while under inves.tigation. The slow processes for contested cases exacerbates costs and frustrations and results in a system that serves neither homeowners or contractors. Frequently, nine to twelve months pass before an errant contractor starts to experience actual discipline. Additionally, it means a bad contractor can cause significant financial damage to numerous homeowners prior to having his license suspended. For innocent contractors, it means they cannot clear themselves from being negatively categorized in the ROC web database as having an "open complaint." • Delays stem from many sources - - a) a two-hearing process instead of a one-hearing process. b) scheduling property inspections c) the Registrar's outdated computer system d) the busy hearing calendar at the Office of Administrative Hearings e) too many cases (about 3,500 +) being worked by too few people in the ROC Legal Department f) the Registrar's Office has no formal process to expedite payment out of the Recovery Fund, even if a Court has already established guilt. II • The Registrar's Office has no performance measure to track their complaint system's duration from beginning to end. Such a measure would be critical to assessing problem areas and reducing processing time. • The ROC's Corrective Work Order and the Citation are largely redundant to one another and having both notices lengthens the process. The Registrar's Office should ~ Revisit their strategic planning process. The ROC should develop a performance measure to track their complaint system's duration from beginning to end in both the administrative system and the court system. Under the current process, the administrative system typically takes 545 days or more and the court system route takes 123 days or more of interaction with the Registrar of Contractors, after the case is won in court. (Recommendation IE) ~ Request the Legislature approve enough staff for their agency so property inspections can occur within three weeks for regular cases and within two days when there are habitation or extreme hazard issues. In the current process, inspections typically do not occur until eight weeks after a complaint is filed and then it takes an additional twenty days or more for inspectors to write and distribute their reports. (Recommendation 1F) The Office of Administrative Hearings (OAH) should ~ Request more administrative law judge positions from the Legislature. They should strive to reduce the waiting times for hearing appointments relating to ROC cases to six weeks or less. It currently takes approximately three months to get into a hearing. (Recommendation 1G) The Legislature should consider: ~ Changing the Registrar ofContractors process by establishing a diverse group of stakeholders to analyze the process and recommend changes. The Registrar's administrative processes for complaints need to be reduced. The current process takes too long and frustrates homeowners, contractors and even the Registrar's staff. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the administrative system and suggest further refinements. The Registrar's Office should participate in the evaluation too. (Recommendation lA) ~ Amending statutes so construction cases contested administratively via the Registrar of Contractors and the Office of Administrative Hearings have the Recovery Fund claim stipulated in the original case determination and order. This would eliminate the current, time-consuming exercise requiring two proceedings. Under such a scenario, complainants would request a specific Recovery Fund amount when they file their complaint. Subsequently, if ROC inspectors verified the complaint, the inspectors would issue corrective work orders stipulating not only what needs to be fixed/accomplished, but also their evaluation of the claim amount. Contractors would still have their due process rights because they could challenge the claim in the main hearing as to both responsibility and amount. (Recommendation IB) ~ Amending construction statutes so cases contested in court have the Recovery Fund claim amount stipulated in the original case determination and order. This would eliminate the current time-consuming exercise where homeowners initially win in court, announce the fact to the ROC, wait twenty or more days and then return to court to ask the judge to direct the ROC to make a Recovery Fund payment. (Recommendation 1C) III »- The Registrar's process for Recovery Fund complaints originating in the courts need to be reduced. The current system takes too long. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the ROC process for judicial complaints and suggest ways to speed up the process. The Registrar's Office should participate in the evaluation too. (Recommendation ID) »- Amending statutes to streamline the Inspection to Citation process. The inspection notice could set an inspection date, inform the contractor about the complaint (via a copy of the actual complaint) and suggest the contractor attempt to work out the problems prior to the inspection. It could give the contractor notice that if the inspector verifies workmanship or other problems at the future inspection, then an official citation will be issued. The current process usually has three written notices at its front end - a Notice of Inspection, a Corrective Work Order and then a Citation. It would be more efficient if this three-step notice process were reduced to two. (Recommendation 1H) »- Adopting a statute, similar to Minnesota's Statute §326-975, to accelerate payment out of the contractor's recovery fund under certain circumstances. (Recommendation II) »- Instructing the Office of Management and Budget to closely track and report the progress of the Registrar of Contractor Information Management System (ROCIMS) computer project to ensure it stays on course and has the necessary resources to be successfully completed. (Recommendation IJ) ISSUE 2- RECOVERY FUND REQUIREMENTS - - ARE THE FUND'S LIMITS SET TOO LOW OR ARE OTHER FUND REQUIREMENTS TOO ONEROUS? See pages 14 - 23. The Recovery Fund's reparation limits are set too low and getting through the claim process is too onerous. • The Fund's $30,000 individual and $200,000 total monetary limits are too low. They were last increased in 2002. Because of the limit caps, some wronged consumers are likely to go away empty-handed or only partially compensated for their losses. Homeowners may only recover a maximum of $30,000 per residence, even though they might loose much more. Once the Registrar disperses $200,000 against a particular contractor, the fund is closed and the Registrar cannot pay more claims against that contractor's license. Homeowners might prove the contractor guilty, yet receive nothing from the Recovery Fund because they happen to be a homeowner who is in line after the fund is closed. Alternatively, homeowners might face actual losses from a contractor's bad acts far exceeding the Recovery Fund's $30,000 individual limit, but have no effective means to collect the monies. • Most complaints require lengthy due process procedures before contractors face discipline. Faster processes like summary suspension and administrative suspensions exist,.but they have many restrictions and thus, are limited in use. • Only actual damages are recoverable. The Fund will not pay back homeowners who expend money on legal fees, expert witnesses or other such costs. • It is too complicated to establish the recovery fund request. The Registrar's Office only gives generalized guidance in developing a homeowner's justification for their recovery fund request. They do not have specific estimating benchmarks for homeowners to go by. IV Homeowners are entirely responsible for cost estimates for work, supplies or equipment. The Registrar staffhas essentially "veto authority." • Estimates are frequently very difficult for homeowners to obtain because other contractors (replacements) tend to shy away from homeowners who have filed with the ROC. • There is no way for a homeowner to get pre-approval for cost estimates. Either homeowners wait for the entire ROC process to finish (typically over a year) or they get estimates, proceed with repairs and hope they will not be second-guessed and rejected. • There is almost no way for homeowners to be compensated for their own sweat equity or for the work of a handyman. • We found other states found creative ways to avoid over extending their recovery funds. They will consolidate claims, limit distributions to proportional amounts per year or allow carryover reparations. The Registrar should: ~ Develop ways to estimate reasonable construction costs in instances where homeowners cannot. The Registrar's Office could issue a preliminary estimate of the value of labor, equipment, supplies and material that would serve as a suggested floor amount for the recovery fund amount. Homeowners could accept this floor amount or get specific estimates. (Recommendation 2C) ". Develop criteria to define and pre-approve some situations when it is reasonable to accept estimates for homeowner "sweat-equity." (Recommendation 2D) ". Examine how other states manage multiple claims against one contractor and develop a like proposal for the Arizona Legislature to consider. (Recommendation 2F) The Legislature should consider: ~ Amending construction statutes to increase individual Recovery Fund claim limits from $30,000 to $50,000. (Recommendation 2A) ". Amending construction statutes to increase the total claim limit against a contractor from $200,000 to $500,000. These changes would compensate or partially compensate more homeowners than allowed under the existing limits. (Recommendation 2B) ~ Removing the $1000 limit found in A.R.S. §32-1121 so that the total cost of the contract is not a factor when using a handyman, just the handyman's total labor charges as a portion of the project charge. (Recommendation 2E) ISSUE 3- IS THE REGISTRAR'S OVERALL PROCESS REASONABLE OR IS IT TOO COMPLICATED? See pages 23-32. The Registrar's process is confusing and too complicated. • The current system is dependent on homeowners' continued pressure on the Registrar to bring errant contractors into compliance with statutes and rules regulating contractors. If a homeowner does not keep pushing for justice, the Registrar will frequently close a case. This is true even if the Registrar's Office confirms the contractor failed to adhere to contracting laws or workmanship standards. • The ROC approach is too segmented. The ROC employees only seem to know about their section. Yet the contractors and homeowners seek a bottom-line "big-picture view" so they v can understand what to expect and what is required. Both homeowners and contractors complain to the Ombudsman Office they are frustrated by piecemeal or contradictory communications from the Registrar's Office. Homeowners and contractors see the complaint process from the standpoint of how long they are mired in the total process, while the ROC staff members speak in terms of how long the case has been in their particular segment (e.g., inspection, citation, legal hearing, order, recovery fund justification, recovery fund hearing, and warrant payoff). • The ROC rarely becomes a party to a case. • The Registrar's Office fails to consistently pursue many aspects ofits regulatory mission. For example, the Registrar might have verified evidence a contractor violated construction laws and harmed a family, yet the ROC will close the case just because the homeowner tires of the fight. We also found the Registrar's Office inconsistently issues fines even in cases where contractors have been suspended or revoked under provisions making financial penalties applicable under law. Additionally, we found the Registrar's Office would receive information a contractor failed to make required workers compensation payments, tax payments and unemployment insurance payments, yet not act on the information.. • Specific to, this case, the contractor in question was accused of not paying workers compensation as required under contracting licensing laws. After the Registrar's Office failed to refer the matter or otherwise investigate, homeowners contacted a State Senator and she asked the Industrial Commission to investigate. The Industrial Commission confirmed the contractor violated the law and issued a $1,000 fine. The Registrar's Office database on the web makes no mention of the violation or the fine. In fact, we could not find any mention of similar infractions by any licensed contractor. • Consumers and contractors say they find the process confusing. They want more cohesive and comprehensive instructions and they want the ROC to flow chart the process so they have a better understanding oftheir deadlines and options. • We informed the Registrar their web site contained some obsolete matrixes, FAQ points, descriptive passages and other misleading information. The Registrar's Office made many corrections and improvements to their web site in the past year. However, the Registrar's contractor database still needs refinement. The database does not disclose the date it was last updated and only displays partial information about contractors' complaints and discipline. • Imaging ofdocuments takes too long. • Case timeframes are not posted on the Internet or elsewhere in public view. As a result, the parties to a case often are not sure what more is required of them, if the ROC has received documents or if a delay is avoidable. • The Registrar's Office fails to supervise or actively monitor settlements between homeowners and contractors stemming from complaints. The ROC closes cases and marks them on the web as "settled" when it is not clear whether the parties will abide by the terms of the agreement. This implies a firmer resolution than what actually exists. • Lastly, we reviewed the survey form and found its design fails to elicit enough feedback for the organization. The Registrar's Office should: ~ Augment their written instructions to make them more complete so consumers and contractors are less confused about their processes. They should flow-chart the process and show each of VI the parties what options are available to them at each possible stage. They should create a consumer handbook and a recovery fund guide. (Recommendation 3C) » The Registrar's Office deserves kudos for recently implemented web site improvements. The site is much more informative and user friendly than what was available a year ago. The Registrar should continue to improve their main web site. The Registrar's web site should display the status of complaints or link to the Office of Administrative Hearings case information. Registrar staff should have quick research options allowing them to point consumers to online, timesaving data and features. (Recommendation 3D) » Put more information into their licensed contractor database and web display. They should note the date the infonnation was last updated (Recommendation 3E) » Consult with Arizona's Government Information Technology Agency (GITA) and develop a project to expand their imaging process so that it is faster and more all encompassing. The current imaging process takes too long, keeps files unavailable and is not comprehensive enough. (Recommendation 3F) » Post case status and timeframes on their web site. (Recommendation 3G) » Monitor settlements of contested cases between homeowners and contractors. They should automatically re-open tabled complaints once they get notice either party defaulted on the deal. (Recommendation 3H) );- Develop another tenn or phrase to describe situations where settlement agreements are in play. They should not display the word "settled" until the matter is fully closed and the parties live up to the tenns ofthe settlement. (Recommendation 31) );- Improve their survey. The survey should identify whether or not the respondent is a contractor or homeowner, whether or not the case went to the recovery fund stage and how long the complaint took to resolve (date complaint was opened to date case was closed). (Recommendation 3J) The Legislature should consider: );- Adding 3 to 4 case contact staff to the ROC's organization so that each case has a single point of contact for all parties. (Recommendation 3A) );- Amending statutes to make the Registrar a party to the case if the State has a clear interest. (Recommendation 3B) ISSUE 4- ARE THERE APPROPRIATE TRIGGERS FOR THE SUMMARY SUSPENSION OF A CONTRACTOR'S LICENSE (AS REFERENCED IN ARIZONA REVISED STATUTES §41l092.11)? See pages 32- 37. We found the Registrar's Office historically avoided invoking the provision that summarily suspends a contractor's license, but a new law is likely to make it easier to issue summary suspensions. • Historically, provisions in Title 41 have guided the Registrar's Office. A.R.S. § 411092.11 (B) says, "Revocation, suspension, annulment or withdrawal of any license is not lawful unless, before the action, the agency provides the licensee with notice and an opportunity for a hearing in accordance with this article. If the agency finds that the public health, safety or welfare imperatively requires emergency action, and incorporates a finding to that effect in its order, the agency may order summary suspension of a license pending VII proceedings for revocation or other action. These proceedings shall be promptly instituted and determined." • Criteria in statute, rule or policy as to what constitutes grounds for Summary Suspension resulting from concern for "public health, safety or welfare imperatively requiring emergency action" as referenced in A. R. S. § 41-1092.11(B) are not defined, so the Registrar was reluctant to use it. However, the 48th Legislature, Regular Session passed and the Governor approved Senate Bill 1417. It refines Arizona Revised Statutes Title 32 relating to contractors. A.R.S. §§32-1171(A) and 32-1171(C), "General Remodeling and Repair Contractors" establishes two criteria where the Registrar may issue a summary suspension -one in the case of a contractor failing to obtain workers' compensation pursuant to Title 23, Chapter 6, Article 4 and the other when the Registrar believes an investigation indicates the public health and safety requires immediate action. • Senate Bill 1417 also addresses abandonment complaints. Contractors who are the subject of five or more substantiated complaints lose their right to take on more work until they get below five complaints in a year's time. • SB 1417 did not establish an expedited investigatory or repair process in cases where there are threats to public health and safety. For a summary suspension provision to be effective, fast intervention is needed at both points. • There is no process to expeditiously determine whether a situation rises to the level where the Registrar can confirm a threat ofdanger to public health and safety requires immediate action. • The Auditor General recommended the Registrar's Office define summary suspension rule criteria in 2003, and the Registrar's Office agreed, but the Registrar's Office has not developed the definition to date. The Legislature should consider: >- Creating statutory criteria to specify situations where the Registrar's office is required to perform expedited inspections (within two working days) when a homeowner credibly alleges a public health, safety or welfare concern exists as the result of faulty acts committed by their contractor. (Recommendation 4A) >- Stipulating that, that in circumstances where the Registrar's Order confirms a public hazard or active safety issue directly attributable to an error by the contractor, the contractor should be required to fix the hazard within a 24-hour period or some other brief time or deliver specific evidence to counter that it is his responsibility. The hazard should be grave enough to potentially cause death, serious bodily harm or prevent habitation. Failure to comply with both of these provisions should result in a default finding releasing the homeowner from his obligation to continue to work with the initial contractor. However, it should not release the contractor from existing damage claims. (Recommendation 4B) ISSUE s- CAN PROBLEM CONTRACTORS "GAME THE SYSTEM" AND AVOID DISCIPLINE? See pages 37~ 42. We found that bad contractors can exploit the ROC system. • The contractor in these cases illustrates the point. He had 25 complaints filed against him in the past two and half years. As of April 16, 2008, the ROC reported these cases were finally closed. Eight families received payments from the Recovery Fund. The ninth and final VIII family was assigned only get a partial Recovery Fund payment of $24,359.66 because the Recovery Fund limits total payouts on anyone contractor to the sum of $200,000. Despite proving the contractor's guilt, seven deserving homeowners, with a total of $96,515 in unrecoverable awards, went away empty-handed because the Recovery Fund limit was reached. • It has been almost impossible to suspend a contractor in less than nine month's time unless the contractor had an administrative problem (e.g., Loses his bond or loses his corporate status because the Corporation Commission dissolved him). This is even true when there are multiple complaints against a contractor. A bad contractor can do a lot of harm in 9 months. While it remains to be seen in practice, the new changes to A.R.S. §32-1171 will likely reduce the time in situations where contractors fail to maintain their workers compensation payments or create a situation where public health and safety are at risk. • Contractors, unlike realtors, do not have standardized contracts. Bad contractors fail to specify timeframes, materials and payment schedules among other things. The absence of such requirements enables badly behaved contractors to exploit unwary homeowners. • Contractors can stall the process by many means. • Complaints closed after a corrective work order, but before an administrative hearing, largely allow errant contractors to thwart the discipline process. • Complaints closed before an inspection and issuance of a corrective work order, thwart the discipline process even more. The ROC web does not display or count such cases. • Problem contractors, who consistently fail to adhere to rules or statutes, skirt the penalty phase by fixing problems shortly before or soon after the Registrar's Office issues corrective work orders. Under these scenarios, contractors may commit multiple violations, but never face a consequence from the State for creating the problem in the first place. • An administrative suspension does not allow a contractor to work, yet it does not automatically release a homeowner from the obligation of working with the contractor. The homeowner must pursue the contractor in an individual complaint and win his case before he is assured that he can terminate the contract. The Registrar's Office should: ~ Create a rule requiring that residential contractors give homeowners a consumer handbook with all formal construction bids. The handbook would list elements common to good construction contracts and display a collection of various sample contracts. It should tell homeowners how to check the record of a contractor and how to document interactions and/or disputes with their contractor. The Registrar's Office should develop the handbook. (Recommendation SA) ~ Set up their official public record posting about each contractor licensee to display the number of times the Registrar's Office verified a complaint against a contractor and the nature of each complaint. It should also indicate the filing date of the complaint, how the complaint was handled and at what stage it was resolved/closed (e.g., before inspection, after corrective work order, after citation, after hearing, after official order, after re-hearing). (Recommendation SC) ~ Display in contractors' records the number of times the Registrar's Office had to issue a corrective work order or citations. (Recommendation 5D) The Legislature should consider: ~ Authorizing automatic criteria in statute, that make contracts voidable, thus gIvmg homeowners a release option in situations where licensed contractors are administratively suspended and fail to clear the suspension after ten to twenty days. (Recommendation 5B) IX ~ Authorizing automatic trigger points in statute that prohibit contractors, who have too many open complaints, from taking on more work until they resolve the complaints or they fall back to a lower number. If a contractor has a defined number of open, confirmed complaints filed against him in a certain period, he should not take on new business until the number of such complaints fall back below the trigger number. SB 1417 addressed the issue of contractors with excessive complaints, but it focused only on contractors who abandon five or more jobs. Contractors who gamer numerous complaints due to poor workmanship are no better than those who abandon jobs. In a sense, they are worse because such job sites are sometimes left in worse shape than before the work began. The natural trigger to limit contractors with an elevated level of confirmed complaints would be the Recovery Fund maximum value. In other words, once confirmed claims against a contractor exceed the total possible Recovery Fund limit, it would block the contractor from taking on new business until the complaints are resolved to the point the Recovery Fund limit is not in jeopardy. With current fund limits, this would mean a contractor could face six full claims before they would be hit the trigger point and have to stop accepting new work. (Recommendation 5E) ISSUE 6- ARE SURETY BOND AMOUNTS SET APPROPRIATELY? See pages 42 - 48 We found that the surety bond system in Arizona is not adequate: • Bond amounts are set low in Arizona ($5,000 to $15,000). Contractors usually purchase their bond for about 3% ofthe face amount, so most pay less than $500 for their bond. • Bonds are so inexpensive (usually less than $500); their protection fails to concern their purchasers (contractors). Contractors usually purchase their bond for about 3% of the face amount, so most pay less than $500 for their bond. • The surety bond system implies more than it delivers. Because bond amounts are low, they tend to suffice for only one or two creditors. Usually homeowners with claims against contractors do not get to collect on the bonds because sub-contractors have already done so. Once the face amount of a bond is used, the bonds have no value until the contractor pays to have them financed again. In this way, it is different from insurance. • Consumers think that when a contractor is bonded, they are safe from monetary loss at least to the extent of the bond amount. This is not true. Bonds are not insurance and once claimed, they are not available to other wronged parties. Even if one is lucky enough to claim a bond, the reimbursement might not fully cover the loss due to the low bond face amount. None-theless, the bond system tends to reduce the financial pressure on the Recovery Fund. • The Registrar's Office is not legally bound to inform consumers about the possibility of collecting on a financial loss (resulting from a contractor) by way of claiming a contractor's bond. Sometimes bonds are available, yet go unclaimed. Homeowners are ignorant of this fact so they fail to claim the bond. • One way to rein in contractors more quickly is to claim a contractor's bond. If the claim is paid and the bond used up, then the ROC administratively suspends the contractor until he replaces the bond. Yet, because the Registrar's Office does not inform complainants of this, homeowners do not know that reparation money other than the Recovery Fund might be available to them. x • Twenty-three states require bonding and the majority of them set their bond minimums at a higher amount than Arizona. The other states' bonds tend to have amount~ starting at $10,000 or $15,000. [See Exhibit G, "Residential Contracting by State] Some states, such as Iowa and South Dakota, have performance bonds. • Contractor liability insurance requirements are lenient in Arizona. Neither errors and omissions nor general liability insurance policies are required for residential Arizona contractors. • Each state handles regulating contracting and residential construction risk differently. Twentyone states require various forms of insurance. Most of these states have minimum coverage amounts in the range of $150,000 per occurrence and $500,000 in the aggregate. Approximate costs are $1,300 annually for $500,000 in aggregate coverage and about $1,500 for one million in coverage. • Some states require bonds and insurance. • Eighteen states require contractors to submit statements of financial condition or credit reports with their license renewals. Fourteen states require Recovery Fund participation as a form of insurance. [See Exhibit G, "Residential Contracting by State] Financial information is an important preventative measure to stop contractors from engaging in more business than they can financially back and to thwart bad contractors from engaging in fraudulent schemes. The Legislature should consider: );. Having fewer bond levels and set the bond amounts to $15,000 for a single license and $30,000 for a dual license if a contractor does $500,000 or less in annual work. For contractors with annual contracts exceeding $500,000, the bonds should be $25,000 for a single license and $50,000 for contractors with dual licenses. (Recommendation 6A) );. Requiring contractors to have liability insurance. They could benchmark to the average amount of coverage required in the twenty-one states that mandate liability insurance. (Recommendation 6B) );. Amending contracting statutes to require the Registrar's Office to obtain more financial information on prospective contractors. A component of this could be requiring contractors to demonstrate proof of financial accountability when submitting applications or renewals. The Legislature could look at what states such as Alabama, Arkansas, California, Florida, Hawaii, Idaho, Louisiana, Maryland, Michigan, Mississippi, Nevada, New Hampshire, North Carolina, South Carolina, Tennessee, Utah, Virginia and Wisconsin require of their contractors to prove financial accountability. Professional accountants should review and attest to these statements prior to their submittal to the Registrar's Office to prevent contractors from submitting untruthful statements. The Registrar should use the financial statements to set each contractor's bond amount. Arizona legislators could examine Florida, Utah, Nevada or California methodologies as examples of jurisdictions with stronger contractor applicant requirements. (Recommendation 6C) );. Amending statutes relating to contractor bonds and complaints to require the ROC to notify every complainant, upon the filing of their complaint, whether or not the contractor's bond is available or has been claimed. The ROC already sends a notification to both parties acknowledging the complaint and announcing the date of property inspection. They should note the bond amount and status on the notification form and explain the bond claiming process too. The form would then serve three purposes - - as a receipt to confirm the ROC received the complaint and notice to the contractor, as a notice about the date of the property inspection and as notification ofthe bond amount and availability. (Recommendation 6D) XI ISSUE 7-- ARE MONETARY PENALTIES APPROPRIATELY APPLIED AGAINST CONTRACTORS FOUND TO BE IN VIOLATION OF STATUTES? See pages 48 - 52. The Registrar's Office is not tracking their penalty program well. We noted: • Two statutes [see A.R.S. §§32-1154(a) (23) and 32-1154(a) (18)] direct the Registrar's Office to levy penalties. • There was not evidence that penalties against errant contractors are consistently levied when applicable [under A.R.S. §§32-1154(a) (23), Failure to Take Appropriate Corrective Action; or 32-1154(a) (18), Contracting While in Suspended/Inactive Status]. • The ROC does not issue penalties if complainants resolve their complaint. Contractors might be guilty and have violated A.R.S. §§32-1154(A)(23), yet if they later manage to satisfy the complainant, they tend to avoid hearings, official findings and the whole penalty phase. It takes a long time for penalties to be issued and there are no instances where penalties accrue automatically under certain conditions. • We did not see comprehensive results of current collection activities. We saw one reference to penalties in a spreadsheet taken from a prior Auditor General audit (2003), but that was it. • The Registrar of Contractor's Posting List appears in two-month increments on the Registrar's web site. The PDF files only list the contractors who lost their licenses due to failure to pay civil penalties. The lists are not comprehensive, but cover weekly summaries ofROC activity. The posting does not give overall tabulations of the number and amount of penalties levied or collected. • We found no evidence the Registrar's Office receives notice when city or county inspectors tag a property for failing to adhere to local building code criteria. • The Registrar's Strategic Plan does not have a performance measure to track and report penalties authorized and collected each year. • The Registrar's staff failed to produce penalty data for us, despite having approximately a year and a half to generate the information. The Registrar should: >- Have a performance measure to track and report penalties assigned and collected each year. (Recommendation 7A) The Legislature should consider: >- Establishing triggering criteria in statute to facilitate the issuance ofpenalties immediately if a contractor fails to respond (defaults), otherwise completely fails to fix items listed on a corrective order with no explanation or fails to ask for a compliance hearing. (Recommendation 7B) >- Requiring contractors forward inspection reports to the Registrar's Office when local government building inspectors cite the contractor for failing to build to code and the contractor takes longer than twenty-one days to make corrections. The statutory change should then require the contractor follow-up with a notice to the Registrar's Office once they have fixed the items listed as problems in the inspection. (Recommendation 7C) XII >- Refining the statutory criteria for detennining when the Registrar must pursue disciplinary action, independent of complainants' individual settlements, with contractors. (Recommendation 7D) ISSUE 8- THE DIFFICULT TWO-PRONGED LEGAL AND FACTUAL QUESTIONS: (A) At what point can a homeowner move on to a new contractor to fix a problem? (B) At what point can a homeowner rightfully deny access to the original contaetor? See pages 53 - 60. We found: • Neither statutes nor rules clearly answer these questions. What is apparent is the current system is confusing and takes too long. Statute nor rule definitively list what steps a homeowner should take, nor how long they should wait, to demonstrate their good faith attempt to address disputed matters with the original contractor. Waiting nine to sixteen months to make repairs is not a reasonable option for most homeowners. Yet there are no plain answers for homeowners. Instead, the laws offer owners only general guidance. It will take months before a judge or the Registrar issue a ruling. The laws encourage homeowners to make an educated guess whether or not to proceed. Even the plain language found in original contracts is not enough because contractors can contend the homeowner somehow prevented them from fulfilling the contract. • No one is empowered to give them a definitive answer or permission. The ROC workers could not guarantee that claims of abandonment would hold up despite weeks or months of no response from the contractor. The Registrar's Office could not guarantee the owners that the cost to repair the errant work would be reimbursed even though building inspectors verified the work was faulty. The owners ask, "What citizen in the state would be willing to live in a house waiting for months at a time where wiring has started one fire and threatened to start another, where there is no air conditioning in summer, or where the back end of their. home was exposed to the elements, burglars and pests?" The owners thought some circumstances so poisoned the relationship that the system should have a mechanism to more quickly deal with such a breach. • The existing laws assume homeowners can wait months before fixing what is broken with their home. In many instances, it is not reasonable to delay repairs. Delays might create unhealthy conditions, leave inherent hazards or swell a homeowner's liability. It does not seem reasonable to make homeowners wait for the better part of a year or even longer for a definitive response. The present system fails to deal with reasonable habitability issues. The system takes a substantial amount of time if the contractor even minimally contests the problem. It invites bad actors to "game the system." There should be criteria where the homeowner is given, in limited circumstances, emergency authority to proceed with specific repairs. The Legislature should consider: >- Going beyond the changes they made via Senate Bill 1417 relating to summary suspensions and define statutory criteria to have expedited inspections and corrective work orders in XIII limited situations where the Registrar's Office confirms the original contractor's error, negligence or abandonment created an acute hazard. Acute hazards could be listed in statute. Example ofacute hazards are: • Faulty electrical work threatening an immediate fire or electrocution danger. • Disconnected essential services such as electric/gas/water (disconnected for longer than three days). • Inoperable cooling or heating apparatus when ambient temperature reaches higher than 90 degrees or lower than 45 degrees Fahrenheit and alternative heating or cooling mechanisms are not available for the structure. (disconnected for longer than three days) • Poorly engineered roofs, walls or bearing beams, which threaten collapse. Homeowners should be allowed to petition for quick relief in such scenarios. Petitions to expedite should have at least three components. The homeowners would need to demonstrate to the satisfaction of the Registrar's Office that the problem poses a threat of serious bodily injury, violates health codes or otherwise make the house uninhabitable until fixed. Furthermore, the property owner would need to show that the problem was the result of negligence or error committed by the contractor's company and not a planned event (e.g., a pre-agreement where both parties, know and agree that repairs will be so extensive, the property owner must vacate the property). Lastly, the contractor must have been given at least three days to make repairs. The contractor would still have the right to contest whether or not they are at fault through the regular course of due process, however, the matter would then just be about the fault determination and possible Recovery Fund or other reparations. This recommendation should be addressed when Recommendation 4A and 4B, relating to summary suspension, are addressed. (Recommendation 8A) >- Defining statutory criteria to allow homeowners to hire a new contractor when a contractor abandons and does not attempt to finish a job. No homeowner should have to wait past the repair time stipulated by the Registrar's Office in the corrective work order. From that date on, the homeowner should be free to hire a different contractor to resolve the problem unless the contractor can provide credible evidence the homeowner barred him from accessing the job in violation ofROC directives. If the contractor produces credible evidence, then the matter must proceed through regular due process channels. However, if the contractor is silent or provides no rationale to the Registrar to explain how the property owner prevented work, then the Registrar can permit the property owner to hire a different contractor. Senate Bill 1417 focuses on stopping contractors who have five or more claims of abandonment from taking on more work, but it does not help homeowners who are already the victim of abandoned projects. Something should be done for these types of cases too. Enacting the recommendation would still give the contractor the right to contest whether or not they are at fault through the regular course of due process, however, the matter would then just be about the fault determination and possible Recovery Fund reparations. (Recommendation 8B) XIV ISSUE 9- CONTRACTORS FREQUENTLY OPERATE AS A LIMITED LIABILITY COMPANY (LLC). WHAT OMISSIONS IN ARIZONA REVISED STATUTES, TITLE 32, RELATE TO CONTRACTORS OPERATING AS LIMITED LIABILITY COMPANY ENTITIES? See pages 60 - 62. • In the course of our review, we noticed instances where limited liability company (LLC) references, in statutes governing contractors, were inconsistent and ambiguous when compared with corporate and partnership references. There are five omissions in A.R.S. Title 32 relating to LLC entities. In many cases, the statutes were silent about limited liability company requirements, yet imposed requirements on partnerships, corporations and sole proprietors. In the context of this investigation, it matters because contractors frequently operate as a limited liability company. The five statutes are A.R.S. §§32-1101, 32-1122, 321151, 32-1156 and 32-1166 relating to contracting, should be updated to clearly reflect that they apply to limited liability companies too. • The Registrar's form mentions limited liability companies, but it asks for a list of corporate officers and directors. Limited liability companies do not have corporate officers or directors, they have "members" or "managers" or "managing members." The form should ask LLC entities to list all managers and list members who hold a 25% interest in the company. • Further, the Registrar's form asks limited liability companies to file a copy of their limited liability company agreement file at the Corporation Commission, but no such filing exists. The Corporation Commission does not require limited liability companies to file their agreements. The Registrar's Office should be asking for the limited liability company's "articles oforganization" in order to accurately reflect the proper legal terms. The Registrar's Office should: ~ Correct their application form to use the proper legal terminology for limited liability company leadership (members, managers, member-managers). (Recommendation 9B) ~ Correct their application form to specify the proper legal terminology relating to the original organization of limited liability companies. Limited liability companies file "Articles of Organization" with the Corporation Commission, not "Operating Agreements." (Recommendation 9C) The Legislature should consider: ~ Amending the five identified statutes relating to contracting (A.R.S. §§32-1101, 32-1122, 321151, 32-1156 and 32-1166), to clearly reflect that they apply to limited liability companies too. (Recommendation 9A) ISSUES 10, 11, 12 AND 13 -- DOES THE REGISTRAR FAIL TO ENFORCE CONTRACTING STATUTES RELATING TO WORKERS COMPENSATION, UNEMPLOYMENT INSURANCE, SOCIAL SECURITY PAYMENTS AND OTHER REQUIRED TAXES? See pages 63 -71. The Registrar of Contractors enforcement process is inconsistent relating to: • A.R.S. §§32-1122(B)(1)(i) and 32-1154 (A)(4) relating to workman compensation laws; xv • AR.S.§32-1154 (A)(4) governing social security; and §32-1154 (A)(4) governing unemployment insurance laws; • and AR.S. §32-1154 (A)(5) governing income taxes or any tax imposed by title 42, chapter 5, articles 1 and 4 and incurred in the operation ofthe licensed business. The Registrar' Office frequently fails to pursue contractors in instances where they have reason to believe a contractor has violated one of these laws. It is not clear what propels the Registrar's Office to pursue a contractor for violation of these statutes or what leads them to detennine not to follow up. The ROC managers say they are complaint-driven, but business obligations such as workers compensation, unemployment insurance or tax payments by contractors are not the concern of homeowners. A number of states require contractors to prove with their applications and renewals that they are current with their workers compensation claims, unemployment insurance payments and taxes. Arizona The management adage, "What gets tracked, gets done" is applicable. The ROC does not actively track whether or not contractors maintain their obligations to the workers compensation fund, unemployment, social security or other transaction taxes. Relating to Contractors Failing to Pay Workman Compensation The Registrar's Office should: ~ Develop formal mechanisms (e.g., interagency agreement) to receive and deliver information related to workers compensation violations to the Industrial Commission. For example: • Upon the ROC receiving infonnation or otherwise determining a contractor may not have adhered to workers compensation laws, the ROC should be obliged to inform the Industrial Commission of the allegation. . • Similarly, the Industrial Commission should inform the Registrar's Office when they substantiate a contractor has failed to adhere to workers compensation laws. (Recommendation IDA) ~ The Registrar should develop rules that automatically trigger a summary suspension of a licensed contractor upon the Industrial Commission substantiating the contractor's failure to adhere to workers compensation payment laws. The finding should trigger AR.S. §321171( A) and summarily suspend the contractor's license. This would be similar to the Registrar's process when the Corporation Commission notifies the Registrar that a contractor's corporation or limited liability company has been dissolved. [NOTE: The Legislature ordered the Registrar to develop rules to implement SBI417.] (Recommendation lOB) ~ Develop a performance measure to reflect their activity and enforcement of AR.S. §§32I I22(B)(l)(i) and 32-1154 (A)(4) relating to workers compensation laws requirements for licensed contractors. (Recommendation IDC) Relating to Unemployment Insurance The Registrar's Office should: ~ The Registrar's Office should collaborate with the DES to develop formal mechanisms to receive information related to unemployment insurance violations from the Department of Revenue. (Recommendation l1A) XVI ~ Develop a performance measure to reflect their activity and enforcement of A.R.S. §32I I54(A)(4) relating to unemployment insurance payment requirements oflicensed contractors. (Recommendation lID) Relating to Social Security Taxes The Registrar's Office should: ~ Develop formal mechanisms to notify the Internal Revenue Service when the ROC receives or develops information indicating a contractor may have violated social security obligations. The ROC should be obliged to inform the Internal Revenue Service of the allegation and facts. (Recommendation 12A) Relating to income taxes, withholding taxes or any other tax imposed on contractors and incurred in the operation of the licensed business. The Registrar's Office should: ~ Developing formal mechanisms (e.g., an interagency agreement) to receIve and deliver information related to tax violations with the Department of Revenue. For example: • Upon the ROC receiving information or otherwise determining a contractor may not have adhered to workers compensation laws, the ROC should be obliged to inform the Department of Revenue ofthe allegation. • Similarly, the Department of Revenue should inform the Registrar's Office when they substantiate a contractor has failed to adhere to workers compensation laws. (Recommendation 13A) ~ Develop a performance measure to reflect their activity and enforcement of A.R.S. §32- 1154(A)(5) relating to tax requirements of licensed contractors. (Recommendation 13C) Relating to Unemployment Insurance The Legislature should consider: ~ Adjusting Title 32, concerning licensed contractors, to automatically trigger an administrative suspension of a contractor's license at the ROC once DES substantiates the contractor failed to adhere to unemployment insurance laws. (Recommendation lIB) ~ Adjusting Title 32 concerning licensed contractors to require the Registrar's Office to collect updated unemployment insurance payment information from all contractors. Essentially, it would be a declaration by contractors (with employees) that unemployment insurance provisions were met. It could be a component of the biennial licensing process. (Recommendation 11 C) Relating to Social Security Taxes The Legislature should consider: ~ Adjusting Title 32 concerning licensed contractors to require the Registrar's Office to collect updated social security payment information from all contractors. Essentially, it would be a declaration by the contractor that his business has met its social security obligations. It could become a component of the existing biennial licensing process. (Recommendation 12B) Relating to income taxes, withholding taxes or any other tax imposed on contractors and incurred in the operation of the licensed business. The Legislature should consider: XVII ~ Adjusting Title 32 regarding licensed contractors to require the Registrar's Office to collect a declaration that transaction taxes were paid by the contractor. It could become a component ofthe existing biennial licensing process. (Recommendation 13B) ISSUE 14- TO WHAT EXTENT DOES THE REGISTRAR OF CONTRACTORS OFFICE CHECK CONTRACTOR BACKGROUNDS? See pages 71 - 75. The current background-checking process is not thorough and this can leave homeowners in an exposed and vulnerable position. Residential contactors have enormous access to items of value when working on homes and they work near children and other vulnerable individuals. We found: • Statutes do not require and the ROC does not perform adequate background checks. Background checks are only performed as a follow-up process on certain applicant provided information. • Applicants are on their honor to truthfully complete applications, but the ROC does not audit applications unless given a tip or otherwise becoming suspicious. The application asks contractors to disclose felony convictions. They need not disclose misdemeanors, civil lawsuits or bankruptcies, so the contractor is not required to reveal misdemeanor convictions relating to personal violence, misconduct involving a deadly weapon as provided in section 13-3102, dishonesty or fraud, arson, theft, domestic violence, narcotics (Arizona Revised Statutes Title 13, Chapter 34, or similar) or sexual misconduct. • Fingerprint cards are not required as they are for numerous other professions. However, the Registrar's Office can decide to fingerprint any applicant if they detect problems like multiple drivers licenses. • Contractors are not required to reveal past or current litigation or bankruptcies. • The Registrar of Contractors does not require a credit check of contractors. • Eighteen states run credit checks or ask contractors to financially document they are financially viable to be in business as a licensed contractor. Florida, Utah and California are all examples of states having stronger applications than Arizona. • There is not a national database for contractors similar to what exists for real estate appraisers, nurses, doctors and behavior therapists. • Accurate and current mailing addresses for contractors are critical, yet the ROC database does not reflect the status of contractor addresses. The ROC might have discovered a contractor's address is undeliverable, but they do not reveal this on their database. The Registrar's Office should: ~ Improve their vetting process for contractors. Their background checks should be more thorough and ask more questions like the Utah and Florida contractor applications or the ArIzona Department of Insurance application. The applications and biennial renewal forms should require contractors to disclose, excepting vehicular matters, whether the contractor was ever convicted of a misdemeanor or felony in any state. Contractors answering "yes" should be required to provide the subject matter, date, court and sentence. (Recommendation 14A) XVIII The Legislature should consider: }o> Developing legislation to require contractors be fingerprinted with their initial application. Realtors, teachers and others in a position of trust are required to have fingerprint clearance. Contractors have access to homes and work near children and other vulnerable persons. (Recommendation 14B) }o> Developing legislation to require contractors to provide, as a component of their application or biennial license renewal a summary of past and current litigation including case number, date, courts, all parties, subject matter and disposition. Contractors should be asked if all judgments, liens or taxes were paid as required. The Utah application and a number of other Arizona agency applications (e.g., Medical Board, Securities, Gaming, Liquor and Real Estate) ask applicants to provide information about judicial actions involving themselves. (Recommendation 14C) }o> Adjusting Title 32 concerning licensed contractors to require contractors to biennially report their known place of business, their statutory agent and answer the question, "Is the address/known place of business information identical to the similar Corporation Commission or Secretary of State record?" Additionally, these adjustments to Title 32 relating to business addresses should require the ROC to post undeliverable business and statutory agent address information on the ROC contractor web database upon receipt from the Corporation Commission or Secretary of State. The ROC should promptly test undeliverable address information they receive from other sources (via a notice letter). Upon confirming the address is undeliverable, the ROC should post the information to their web database. (Recommendation 14D) ISSUE 15- WHAT IS THE SCOPE OF DISCIPLINE AFFECTING A CONTRACTOR'S REMAINING LICENSES ONCE HE HAS ONE LICENSE SUSPENDED OR REVOKED? See pages 75 - 78. We found: • When a contractor is under an administrative suspension, they are not supposed to perform any contracting duties until they fix the administrative problem that led to the suspension, yet some contractors ignore this rule. • In workmanship situations where the ROC has already suspended or revoked one license, then the Registrar must gather the contractor's other licenses and go through a second process to determine the fate of the remaining licenses. There. currently are no mechanisms to automatically cancel remaining contracting licenses possessed by the contractor if one of his licenses is revoked. Instead, Registrar staff or complainants must initiate another complaint after the original suspension or revocation order. It is only at that time the other licenses are gathered and called into question. • The ROC cannot take away a license automati~ally from a contractor if they issue it in error. If they issue a license in error, the Registrar must go through the due process routine to revoke the license that should not have been issued in the first place. • The current process to revoke multiple licenses takes too long. Revoking the second set of licenses requires a second due process run. So this greatly extends the time that problem contractors are allowed to operate and solicit work. In so doing, it exposes the public to risk. XIX • Contractors can request new licenses subsequent to a homeowner(s) filing an official complaint. Nothing in current statute prohibits the ROC from issuing a new license while the old one is under question. The Legislature should consider: )l- Developing legislation prohibiting the issuance of new licenses to contractors while they have open complaints. Instead, legislators could create a new category of contingent or provisional licenses. (Recommendation 15A) )l- Developing legislation authorizing the Registrar to revoke remaining licenses or rescind places where the contractor is listed as a qualifying party simultaneously in instances when the Registrar orders the revocation of one of the contractor's licenses. The initial hearings, findings and order should address the contractors other licenses and listings as a qualified party so as to avoid the redundancy required with the existing system. The scope of discipline affecting a contractors' remaining licenses should be declared and debated in the original charges and hearing process. A completely new set of hearings should not be necessary. (Recommendation 15B) ISSUE 16- TO WHAT DEGREE ARE GENERAL CONTRACTORS REQUIRED TO VERIFY WHETHER A SUB-CONTRACTOR HAS A LICENSE IN GOOD STANDING WITH THE REGISTRAR OF CONTRACTORS? See pages 78 - 79. Contractors may hire licensed or unlicensed individuals to work for them. However, contractors must use a licensed sub-contractor when the task requires licensure. Unlicensed employees improperly engage in work requiring construction licensure typically for one ofthree reasons. 1. They lie to general contractors about their license status. 2. They do not realize the task requires licensure. 3. They and the general contractor knowingly break the law. We found that lax documentation practices contribute to the problem. • Sub-contractors are not required to offer any proof oftheir licensure to general contractors. • This makes it hard for the Registrar's Office to punish general contractors who knowingly have unlicensed workers performing work which requires a license. Sloppy general contractors avoid punishment by saying, "I didn't know the sub was not licensed." • Additionally, there is no requirement to license construction job superintendents. • Homeowners say these regulations create an unfair situation because they are held to a higher standard than licensed contractors are. The ROC makes homeowners verify their replacement workers have appropriate contractor licenses to perform particular tasks. Without this verification, the ROC disqualifies the workers' bills from fund reparation. The same standard is not applied to general contractors because they do not have to use licensed job superintendents, they do not have to check whether their sub-contractors are licensed, they can use handymen and day laborers and they can count their own work. Homeowners cannot do any ofthese things. • A.R.S. §32-1121 relates to handymen restrictions and it trips up many people. The law has a provision stipulating the total construction cost cannot exceed $1,000 if one uses a handyman. xx The Legislature should consider: )I. Developing legislation to require contractors to obtain the license number and initially verify the good status of each sub-contractor they use. In turn, sub-contractors should then be required to deliver notice of any change of license status to the general contractors they work for within thirty days of any change. (Recommendation 16A) )I. Revise the statute relating to handymen. A.R.S. §32-1121 places a $1,000 limit on the total repair cost of a job, not just a $1,000 limit on what work can be done by a handyman. It does not apply to contractors, only homeowners. Thus, an inequity occurs. A handyman should be allowed to perform up to a $1,000 in labor which does not require licensure. The total job cost should not be tied to the handyman. (Recommendation 16B) )I. Requiring site superintendents be licensed. This requirement will require the creation of a new category oflicense. (Recommendation 16C) ISSUE 17- IS IT PROPER FOR THE REGISTRAR TO ENCOURAGE COMPLAINANTS TO PURSUE CASES ON THEIR OWN WITHOUT THE BENEFIT OF LEGAL COUNSEL? See pages 79 - 82. Parties represented by attorneys fend better at the Office ofAdministrative Hearings. • Both homeowner and contractors fared better when they used attorneys according to a survey of cases performed by the Director ofthe Office ofAdministrative Hearings. • In this case, complainants watched two of the early cases fail and attributed it to the owners representing themselves without an attorney. Families in latter cases got attorneys and they won. • The owners complained they got bad advice when told they could represent themselves in administrative hearings. They said ROC staff and materials are indifferent and imply attorneys are not necessary. While it is factually true attorneys are not required, citizens said it gave them the wrong impression. They expected conversational meetings where they could just say their story and show their documents, but instead got a hard-edged, legalistic, unforgiving process that intimidated them. Once they experienced actual hearings, the citizens felt the ROC failed to prepare them. Owners thought the ROC should advise citizens that because the two agencies' systems are so complicated, parties tend to fare better with an attorney. • The Registrar said, "It is wholly inappropriate to advise the parties that they should use an attorney." The Registrar's Office should: )I. The Registrar's Office should change their oral instructions, pamphlets and web site information so they note that parties who utilize a lawyer in contested cases usually improve their position. The instructions could then state a party/layman may represent himself, if he cannot afford an attorney. (Recommendation 17) XXI Ombudsman Office - Citizens' Aide Final Report of Investigation· Registrar of Contractors Case #20062692 December 12, 2008 Final Report ofInvestigation Case # 20062692 December 12, 2008 Registrar of Contractors SUMMARY Nine homeowners contacted us upon deciding the Registrar of Contractor's system was failing them. The homeowners became involved in the Registrar's process when they filed complaints against a dual-licensed contractor. Some of the complainant homeowners initially filed with the Registrar's Office, others with the Superior Court and some filed at both locations. Each owner desired financial recovery via the Residential Recovery Fund. Access to the Recovery Fund is dictated by statutory constraints and controlled by the Registrar's Office. Homeowners in both the administrative and the civil court processes felt the Registrar of Contractors Office seemed indifferent about the length of time and difficulty of their process. Owners and contractors both complain to the Ombudsman Office that the Registrar's Office process takes too long. Most of the twenty-five homeowners upset with the contractor in question filed their complaints with the Registrar in the spring or summer of 2006. After about two years, these complaint cases had gone through most of the system and were closed. Twenty-three of the complaints resulted in discipline while two complaints settled or withdrew. Eight homeowners recovered money from the Recovery Fund to compensate or partially compensate them for their loss. The Registrar's Office reported on April 16, 2008, that the Attorney General's Office would likely approve the ninth claim for the remaining monies ($24,359.66). At that point, the Registrar will close the fund because it will be at its limit. Seven deserving homeowners, with a total of $96,515 in unrecoverable awards, will go away empty-handed despite proving the contractor's guilt. ALLEGATION The complainants alleged the Registrar of Contractors processed the complicated Recovery Fund complaints in an untimely manner. OVERVIEW The complainants were overwhelmingly upset at how long the process takes. Many became embroiled in the dispute with the subject contractor in the previous year or even the year before that. They said they alerted the Registrar's Office months earlier to the contractor's bad acts, but a continuous stream of new people were victimized as the Registrar's Office plodded through their long process. Complainants stated that they had no idea the Registrar's complaint process would drag on for so long. 1 We worked with the Registrar's office to determine a total case time estimate for typical administrative and court complaints. [See Exhibits A and B]. We determined that on average, the administrative process at the ROC takes over 538 days and the ROC portion of the court process takes approximately 178 days, with 123 days occurring subsequent to the initial court action. Consistently the vast majorities of contractors' licenses (slightly over 90%) are highly regarded and are not involved in the complaint process. These licensees pride themselves on quality workmanship and good customer service. Regrettably, there are a still a significant number of contractors who receive a complaint. The Registrar of Contractors received 11,867 complaints in FYO? against 5,679 different licensees. In FY06, 11,974 complaints were received. About one-third of the complaints coming into the ROC are serious complaints requiring adjudication. Most of these serious complainants seek reparation from the Recovery Fund. The remaining two-thirds of the complaints are addressed relatively quickly because they are less complex. Typically, less complex complaints are fixed or resolved prior to hearings, not substantiated by the ROC, or the homeowner declines to continue. In 2007, there were about 4000 or so serious complaints. About 2,700 (67%) resulted in an administrative hearing while the remaining 33% went into default (uncontested). The ROC reports that each year, about 3% ofthe contractors in Arizona are suspended or revoked. Serious complaints must adhere to the lengthy course of action laid out in statute and rules. It may take years to wind through the Registrar's system, as there is no expedited procedure. When contractors fail to fix a problem, or otherwise fail to adhere to statutes or rules, they become subject to penalty assignments including license suspensions or revocations; bond forfeiture; the assessment of statutory penalties and/or Recovery Fund debt assignments. However, getting to the point where a contractor is actually subject to a penalty is the rub. This investigation will focus on the troubles created by such a long, complicated process. BACKGROUND The Arizona Registrar of Contractors (ROC) was established in 1931 by the Arizona State Legislature to serve as the regulatory body over contactors. The Registrar issues licenses, inspects for quality of workmanship and investigates complaints of statutory violations by contractors. Currently, the ROC oversees 238 specific license classifications within the three categories of commercial, residential, and dual licenses. The ROC is a 90/1 0 self-funded agency, with 90 percent of the license fees reserved for agency operations and the remaining 10 percent deposited into the State General Fund. Its mission is, "To promote quality construction through a licensing and regulatory system to protect the health, safety and welfare ofthe public." [Strategic Plan, 2008 to 2012.] 2 The Registrar of Contractors maintains the official record listing such things as the name, address and type of license for each licensed contractor in Arizona. They gather and disseminate histories of complaints against licensed contractors and administer the Recovery Fund to reimburse financially harmed homeowners. The ROC also may issue orders to "cease and desist" and impose civil penalties against persons who engage in contracting without a license. The Arizona Republic noted in a June 1, 2007 article that Arizona is one of 35 states that licenses or registers contractors. Most of these states belong to the National Association of State Contractor Licensing Agencies (NASCLA). Only 14 [AL, AZ, CT, FL, HI, IN, MA, .MD, MI, MN, NV, NC, UT, VA] have variations of recoveryihome improvement guarantee funds. Each fund is different and has its own unique benefits and limitations. In Arizona, the Recovery Fund is exclusively for homeowners (owner-occupied residences). Arizona homeowners have two courses of action available to them if they become embroiled in a dispute with a contractor regarding defective construction. Subject to statutory time constraints, they may file a complaint at the Registrar of Contractors or file a civil lawsuit in court alleging warranty breach, contract breach or tort negligence. If they want, homeowners can pursue both courses of action. Either method can lead to a Recovery Fund distribution. The Fund's revenues come mainly from annual fees paid by residential contractors. All residential contractors are required to participate in the Fund unless they can establish they are able to maintain financial resources amounting to at least $200,000. Only a few contractors opt for the financial resource route. Money for the fund is collected primarily in the form of an assessment, which cannot exceed $600 per biennial license period, paid by each residential contractor. The ROC is also required to file an annual statement of financial condition of the Fund with the Department of Insurance. The Fund had a balance at the end of FY 2005-2006 of $10.5 million and a balance at the end ofFY 2006-2007 of$11.9 million. History of Payouts from the Fund FY 2003-2004 $5.5 million FY 2004-2005 $5.8 million FY 2005-2006 $4.1 million FY 2006-2007 $6.2 million The Registrar's Office considers the Recovery Fund healthy and well funded. The Registrar's staff said that a few years ago they lowered the Recovery Fund assessment they collected from each contractor because the fund seemed larger than what was needed to cover claims. Claims against contractors must be filed within a two-year statute of limitations period. From that point forward, the process usually takes well over a year or more before a homeowner 3 may succeed and get a Recovery Fund disbursement. The current administrative process is taking approximately 535 days in straightforward cases where there are not appeals, rehearings, settlements or extraordinary delays. The current court process (in conjunction with the Registrar's Office) is taking approximately 123 days at the ROC subsequent to a court case decision for the plaintiff for straightforward cases. The preceding court process may vary in time from a few months to over a year. RESEARCH We interviewed the complainants and eight of the Registrar's staff. In order to benchmark nationally, we interviewed staff from the National Association of State Contractor Licensing Agencies (NASCLA) and looked at statistical information on the Nationalcontractors.com web site. To benchmark particular activities across agencies, we also interviewed staff from the Industrial Commission; Motor Vehicle Department; the Board of Technical Registration; the Department of Building, Fire & Life Safety, Medical Board; Nursing Board; Dental Board; Chiropractic Board and the Office of Administrative Hearings. We reviewed Arizona Revised Statutes, Title 32 and Title 41 and the Arizona Administrative Code rules applicable to the Registrar of Contractors and the Office of Administrative Hearings. We examined the Registrar's complaint process flow and times. We compared the two routes to the Recovery Fund (Administratively through the Registrar Office and via court). We looked at the individual cases and examined how they fit into each process. We read the most recent Auditor General Report, the Registrar's Strategic Plan for 2007 and their newer Strategic Plan 2008 through 2012. We read the "Concept of Operations" for the Arizona Registrar of Contractors relating to the proposed ROC Information Management System (ROCIMS) by Data Site Consortium, Incorporated. We read the related Project Investment Justification and Summary for the ROCIMS computer project prepared by the ROC. We examined how other states in the United States handle residential contractor complaints. We gathered relevant facts, such as: 1. The total number of active contractor licenses, 2. Number of complaints against licensed contractors, 3. Total complaints closed through compliance, 4. Number of cases resulting in a citation for hearing, 5. Total number ofdisciplinary license revocations and suspensions, 6. Total number ofdisciplinary penalties, 7. Recovery Fund claims received, 8. Recovery Fund claims paid out, and 9. Length of time it took if one successfully pursued a Recovery Fund claim (from initial complaint to payout) in the administrative or the court process. 10. How the ROC measures their service and performance. 4 ISSUE 1 - - DOES THE RECOVERY FUND SYSTEM TAKE TOO LONG? We looked at contested complaints on their journey through the system to the Recovery Fund. Created in 1981, the Recovery Fund covers claims against licensed contractors made by owner-occupied residential homeowners. The Legislature established the Fund to assist consumers who suffer financial loss due to the actions of a licensed residential contractor. The Fund can compensate a homeowner injured by an act, a representation, a transaction or the conduct of a residential contractor. Consumers can recover actual damages they suffered up to 2 years after the loss occurred. As exhibits A and B convey, the process is involved. Two titles in the Arizona Revised Statutes corne into play. A.R.S. Title 32, Chapter 10 specifically relates to statutes regarding contracting laws while Title 41 regards statutes relating to State Government including the administrative hearing process utilized by the Registrar's Office. In brief, the current process is as follows: When a homeowner files a complaint with the Registrar of Contractors, initially the Registrar's Office urges the contractor and the homeowner to attempt to resolve the dispute informally. If the parties do not work out their differences, then an inspector sets up an inspection. In the inspection notice, the ROC tells the contractor the homeowner is not happy and assigns an inspection date. About 8 weeks later, inspectors for the Registrar's Office inspect the subject property. If the inspector substantiates problerns, he has two to three weeks to write and issue a corrective work order. The work order directs the contractor to make listed corrections and gives the contractor a minimum of 15 days to remedy the deficiencies. The homeowner cannot bar the contractor from the property during this period. The homeowner must continue to press the Registrar to remain active and pursue the contractor over the items listed in the corrective work order; otherwise, the ROC will close the case. If the contractor fails to fix the problems or if the homeowner remains otherwise unsatisfied, then the homeowner must request the Registrar's Office issue a citation. The Registrar's office then notifies both parties with a formal notice. The Registrar's Office must then schedule a hearing with the Office of Administrative Hearings. It occurs about three months later. Within twenty days of the hearing, the administrative law judge issues his findings and recommendations to the Registrar. If the Registrar of Contractors reviews these findings and concludes a contractor is guilty of violating contracting laws [contained in Arizona Revised Statutes Title 32 and the Arizona Administrative Code R4-9-101 through R4-9-131], then the Registrar may issue orders subjecting the contractor to various forms of discipline. A contractor could have their license suspended or revoked, be issued a penalty for certain statutory violations, lose their bond, incur a Recovery Fund judgment assessment against them or a combination of these things can be imposed. If the goal is to get reparations from the Recovery Fund, the homeowner must then take either their winning judgment from court or their Registrar order of suspension or revocation and submit a request to the ROC documenting how much they wish to claim. 6 This claim amount is then subject to a second round ofhearings. The Recovery Fund staff are told what amount was determined in the hearing and they start the check request process. About twenty days later, the owner gets a check. While the contested process outlined above might not sound too complicated, in practice it usually takes over a year to complete and requires the active and steadfast determination of the complainant. Thus, it might be over a year or more before a wronged homeowner can prevail and actually receive a Recovery Fund award from the Registrar ofContractors. To arrive at these numbers, we looked at how long it takes to get a Recovery Fund award via the two means one may use to get an award --- through the administrative process and/or through the civil court process. We asked the Registrar's Office if they had a flow chart, matrix or other means of describing their process. Only a simplistic five-step matrix was on the Registrar's web site. The Registrar said that detailed diagrams of their process were in development. Their goal was to expedite the system in the near future. They planned to use the new diagrams as tools to help them identify ways to expedite the system. Even though a year has passed, we never received the diagrams. Because there was no comprehensive pre-existing diagram or flow chart listing the components of a typical complaint progressing through the system, and we were not given anything from the Registrar's development team, we created our own. With the assistance of Registrar of Contractor staff, we documented sixty-six possible components in the administrative process [Exhibit A and Timeframe A] and over thirty-three components in the Registrar of Contractor's segment ofthe court process [Exhibit Band Timeframe B]. We applied current timeframes to the two processes based on estimates provided by the Registrar's staff. We based the scenario estimates on an optimistic, straightforward process without early defaults, re-hearings, appeals, settlements or extraordinary delays. We determined it could take a homeowner approximately 545 days to navigate the Registrar's complete administrative process and approximately 123 days to navigate the Registrar's segment of the court process, subsequent to the court's initial judgment, in order to collect from the Recovery Fund. This investigation examined cases that ran the complete continuum of the system, not cases which settled early. The homeowners represented in this investigation each had cases in which the contractor refused to correct deficiencies, yet disputed the complaint and demanded his complete due process rights. In the few instances where the contractor admitted guilt and asked to settle, he ended up defaulting. When the settlements failed to last, the impacted homeowners had to rejoin the complaint process by asking the Registrar's Office to reopen their complaints. Timeframes We separated the time component into two segments for each of the two processes. We asked how long the overall process takes to move through court or move through the administrative route if one is successful in getting a Recovery Fund payout. In other words, how many days 7 would typically lapse from the time a complainant files a complaint, to the day they get a check from the Fund? We knew both processes usually require two hearings. So we also wanted to know a subset of the first question, namely, what was the length of time between the first hearing and the final payout? In other words, once there was an initial judgment determination by the court or a revocation/suspension by the Registrar in the administrative process, how long would it be before a homeowner got reparation? The timeframe for the two processes For the first segment, we extensively interviewed the Registrar's division leaders and developed both narrative and numerical exhibits designed to illustrate the steps within the two processes and their time estimates. Exhibit A is a narrative of the Administrative route. We documented 66 distinctive components in the administrative process. This translates numerically into a 43-step process. Exhibit A1 documents a typical timeframe and shows how this can take 545 days even if no judicial reviews or other appeals are required. Should additional hearings be required, each one might take months to get on a civil court or Office of Administrative Hearing calendar. We estimated that an administrative case could theoretically drag out over 1,100 days beyond the typical timeframe if a party dragged out meetings, contested everything possible and got a hearing or appeal at every given opportunity. Such an excruciating case could last 1,645 days (545 + 1,100 = 1,645). Exhibit B is a narrative of the civil court route to the Recovery Fund. We documented 33 typical components in the civil court process leading to the Recovery Fund. This translates numerically into a 29-step process. Exhibit B1 documents a typical timeframe and shows how this translates numerically into 178 days of interaction with the Registrar of Contractors Office. This amount equates to 55 days of likely interaction with the ROC, concurrent with court time, followed by an additional 123 days after the case is won in court. It does not count appeals. Should additional hearings be required, each one usually takes months to get on a civil court calendar. The process from the point of judgment forward We then honed in on the final segment of the process. We asked how long it typically takes a complainant to receive payment from the Recovery Fund once the homeowner wins a judgment in Superior Court or obtains a final disciplinary order of suspension or revocation from the Registrar. The staff reported that in FY06, the actual time range ran between 135 and 195 days and had an average of 156 days. In FY07, it took longer. The average was 180 days. It is important to remember this time runs after the plaintiff gets through the court process or after they obtain an official order from the Registrar in the administrative process. Court action can take anywhere from a couple of months to a couple of years. The staff said it also depends on how fast homeowners submit their judgment to the Registrar of 8 Contractors. If a homeowner fails to notify the Registrar's Office at the beginning, when the homeowner commences action for a judgment in civil court, there is no formal penalty. However, in that case, it delays the claim because the Registrar's Office must still verify the items and document their findings. Exhibit AI, the administrative process, shows that if the Registrar's Office took all the time they allocate, then it would not be unusual for 249 days to elapse from the date a contractor's order of suspension! revocation is effective to the date ofRecovery Fund payout [#39 through #66]. Exhibit BI, the civil process, shows approximately 123 days elapse from the date the ROC receives a judgment from a court judge until the date of payout from the Fund [#9 through #33]. These numbers do not reflect the time actually spent in court, but only the time spent in the Recovery Fund line. Appeals or other court actions subsequent to the original judgment are not controlled by the Registrar's Office and could take an indeterminate amount oftime. Complainants'View The homeowners think the process takes too long if one desires Recovery Fund reparation. They said ROC inspections took a ridiculously long time to schedule and were subject to rescheduling delays. It was not unusual to wait for over two months for an inspection. They also were upset that administrative hearings took months to schedule or re-schedule. Registrar of Contractors View The Registrar's office does not actively keep track specifically how long cases take from beginning to end. They do track time within segments of their process. The ROC staff noted that some very lengthy cases are due to the mutual agreement of the contractor and the homeowner and are not the result of undue discord. The ROC staff gave the example of the homeowner wanting a particular material used in a repair job. They said it might take months to receive the order. This delay is not held against either party as long as the material is selected and ordered promptly. The Registrar staff conceded that the contested process takes a long time. They say it frustrates them too, but they pointed out this is largely because due process requirements impose duties on them. The Registrar's Office said they must allow the parties to contest issues and give time for responses. They noted it also takes about three months to fit a case into the Office of Administrative Hearings schedule, it takes about eight weeks to schedule property inspections and then more time to perform their legal reviews. The Registrar staff said their obsolete computer system causes numerous inefficiencies for both staff and the public. The Registrar of Contractors said they recently received permission to update their computer. They provided us with a copy of their Project and Investment Justification (PIJ). Their proposed new information management system is called Registrar of Contractor Information Management System (ROCIMS). The PIJ for ROCIMS stated, 9 "Current agency procedures for issuing and renewing licenses, investigating complaints, and providing financial reimbursement through the Recovery Fund are labor-intensive and lengthy in duration." The Registrar's staff places much of the blame for these problems on their current 30-year-old information technology (IT) and communication systems. They say the system is overly reliant on individualized Microsoft Word and Excel software instead of integrated computer systems. Findings for Issue 1 Finding lA The Registrar's Office process takes too long. The lengthy process frustrates homeowners, contractors and even the Registrar's staff. It is not reasonable to expect a homeowner to wait over a year to fix his house, nor should an innocent contractor have to spend over a year trying to clear his name. No matter which of the two processes (administrative or judicial) is used, parties are looking ata complaint-topay- off-timeframe that typically runs in excess of a year. Complaints having re-hearings, appeals, settlements or extraordinary delays could stretch on an additional year or so longer. Segments within the process clearly take too long. The final two segments (from conclusive findings of guilt, to determination ofrecovery fund amounts, to the payoff date) exemplify the problem. The administrative route runs approximately 249 days for these final segments, while the court route typically runs about 123 days. Finding IB The current process, whether by court or via the administrative hearing route, typically requires two hearings and this significantly delays the process. The administrative route has one hearing to determine guilt and discipline (e.g., suspension or revocation). It has another to determine the Recovery Fund amount. The judicial route to the Recovery Fund requires homeowners to make two trips to Court. In the first, they have their original case heard. Should they prevail in court, then the homeowner must take their winning judgment to the Registrar's Office. The Registrar then requires the homeowner to state a desired Recovery Fund amount. An amount might already be listed in the original order, but no matter, the homeowner must go through the exercise. The homeowner determines the amount and files a twenty-day (minimum) notice to say he intends to go back to court and get the judge to "direct payment." The homeowner must wait for a minimum oftwenty days and then they can go back to court and request the judge direct the Registrar to pay the homeowner from the Recovery Fund. This second round at Court or at administrative hearing seems to be a time-consuming, unnecessary complication. It would seem more efficient and logical that the Recovery Fund amount be determined as a component of the original court action or alternatively as an original component of first administrative hearing and subsequent order. 10 Additionally, the Registrar's Office has no formal process to expedite payment out of the Recovery Fund, even jf a Court has already established guilt. The current period of approximately 123 days is excessive. Minnesota developed a quicker way to access their recovery funds. It has a statutory process (see Minn. Stat. §326-975) to speed up their recovery fund payment procedure. Minnesota homeowners must apply if they wish to be considered for accelerated payment out of the contractor recovery fund. Finding Ie Another source of delay is the length of time it takes to schedule a property inspection. ROC inspectors say labor constraints mean it takes about eight weeks before they can find the time to visit a property. It then takes the inspectors approximately twenty or more days to write and disseminate their report findings. Private sector appraisers tend to inspect and write up mortgage appraisal inspections in two to five days. Finding ID The Registrar's Legal Section has too many cases to handle, given their staff allotment. Last year, the section worked about 3,500 cases. The majority of these cases involved the Recovery Fund, which meant the section frequently had to arrange two or more hearings for each case and issue an equal amount oforders. Finding IE Another major source of delay is the Office of Administrative Hearings (OAH). The Office of Administrative Hearings director, CliffVanell, reported that, "In FY 2006, 95% of all ROC cases were scheduled for hearing by the 1lOth day from the date the Registrar of Contractors requested that a hearing be set:' By a large margin, the ROC is the Hearing Office's biggest customer. In order to achieve a reduction down to 90 days, the Office of Administrative Hearings recommended the addition of a .5 Administrative Law Judge to hear ROC cases, and the full implementation ofvideoconferencing. Finding IF The Registrar's computer system slows the process. The ROC is aware the current computer system is deeply flawed and too slow. They know this adversely affects the system participants. To address the problem, they created the Registrar of Contractor Information Management System (ROCIMS) project. If delivered as described in the December 2006 Project Investment Justification, this project will do much to address timeliness issues of the Registrar's Office. Citizens can expect to see more self-serve information; more complete and timely contractor status information (available prior to entering agreements with contractors); faster receipt and tracking of consumer complaints; enhanced tracking of investigative matters; improved adjudication processes and Recovery Fund release of monies. Simultaneously, ROC staff will enjoy reduced data entry and the reduction of other manual activities. Finding IG The Registrar's Office has no performance measure to track their complaint system's duration from beginning to end. 11 When we asked staff how long the process took, they instead reported how long a complaint took while in a particular area, not how long it had been in the overall process. They did not track complaints from the date a homeowner files a complaint to the day the Recovery Fund mails a check to the victorious homeowner. Thus, they do not have a performance measure counting the number of total days it takes to completely handle a complaint. Such a measure would be critical to assessing problem areas and reducing processing time. We found that under the current process, the administrative system typically takes 545 days or more and the court system route takes 178 days or more. Finding IH The ROC's Corrective Work Order and the Citation are largely redundant to one another and having both notices lengthens the process. Both notices inform contractors in writing that ROC inspectors have received a complaint. Both notices say that failure of the contractor to correct items within a reasonable amount of time (typically 15 days) may result in the ROC imposing penalties. Recommendations for Issue 1 Recommendation IA The Registrar's administrative processes for complaints need to be reduced. The current process takes too long. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the administrative system and suggest further refinements. The Registrar's Office should participate in the evaluation too. Recommendation 18 The legislature should consider amending statutes so construction cases contested administratively via the Registrar of Contractors and the Office of Administrative Hearings should have the recovery fund claim stipulated in the original case determination and order. This would eliminate the current, time-consuming exercise requiring two proceedings. Under such a scenario, complainants would request a specific Recovery Fund amount when they file their complaint. Subsequently, ifROC inspectors verified the complaint, the inspectors would issue corrective work orders stipulating not only what needs to be fixed/accomplished, but also their evaluation of the claim amount. Contractors would still have their due process rights because they could challenge the claim in the main hearing as to both responsibility and amount. Recommendation 1C The Legislature should consider amending statutes so construction cases contested in court have the recovery fund claim stipulated in the original case determination and order. This would eliminate a time-consuming exercise requiring two court proceedings. 12 Recommendation ID The Registrar's process for Recovery Fund complaints originating in the Courts need to be reduced. The. current system takes too long. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the ROC process for judicial complaints and suggest ways to speed up the process. The Registrar's Office should participate in the evaluation too. Recommendation IE The Registrar's Office should develop a performance measure to track their complaint system's duration from beginning to end. It should count from the date a homeowner files a complaint to the day the Recovery Fund mails a check to the prevailing homeowner. They should also establish goals and objectives designed to reduce the overall timeframe for complaints. Recommendation IF The ROC should submit a request to the Legislature justifying an increase in full-time employees (FTEs). They should ask for legislative approval of enough staff for their agency so property inspections can occur within three weeks for regular cases and within two days when there are habitation or extreme hazard issues. Recommendation 1G The Office of Administrative Hearings (OAH) should request more administrative law judge positions from the Legislature to reduce the waiting times for hearing appointments relating to ROC cases to six weeks or less. Recommendation IH The legislature should consider amending statutes to streamline the Inspection to Citation process. The inspection notice could set an inspection date, inform the contractor about the complaint (via a copy of the actual complaint) and suggest the contractor attempt to work out the problems prior to the inspection. It could give the contractor notice that if the inspector verifies workmanship or other problems at the future inspection, then an official citation will be issued. The current process usually has three written notices at its front end - a Notice of Inspection, a Corrective Work Order and then a Citation. It would be more efficient if this three-step notice process were reduced to two. From the moment the contractor receives a notice of an inspection and copy of the complaint, they have warning where the homeowner believes the contractor erred, violated statutes or failed to adhere to workmanship rules. Contractors would have from the time ofthat notice until the inspection to "make it right." Subsequent to the inspection, the ROC inspector will issue a citation if he verifies the problems exist and finds the project does not conform to workmanship standards, rules or statutes. The contractor would have 15 days to either fix the problem to the homeowner's satisfaction or write to the Registrar and ask for a hearing to contest the findings in the citation. 13 Recommendation 11 The Legislature should consider adopting a statute, similar to Minnesota's Statute §326-975, to accelerate payment out ofthe contractor's recovery fund under certain circumstances. Recommendation IJ The Legislature should consider instructing the Joint Legislative Budget Committee (JLBC) to closely track the progress of the ROCIMS computer project to ensure it stays on course and has the necessary resources to be successfully completed. Issue 2 - Recovery Fund Requirements - - Are the Fund's limits set too low or are other Fund requirements too onerous? The Recovery Fund has many restrictions, including monetary limitations. Unlike a bond, the Recovery Fund is not subject to claims by suppliers, subcontractors, laborers or others. The fund is limited to homeowners. Compensation for damages to anyone individual cannot exceed $30,000, nor may the obligation per contractor climb past $200,000 [see Laws 2002, Chap. 179 §§1 and 5]. We researched the history of these limit settings and found the Legislature last adjusted the fund limits in 2002. The Recovery Fund is available to claimants via two paths. Using the Registrar's Administrative Process, a homeowner may submit a Recovery Fund claim once they have obtained an order finding violations and suspending or revoking the contractor's license [A.R.S. §32-1154]. Alternatively, it is also available to claimants in court systems under certain conditions. If a homeowner obtains a judgment in court and cannot collect all the damages owed, the homeowner can apply to the Recovery Fund [A.R.S. §32-1136] for partial payment. If a homeowner goes the court route and wins, then he or she is required to bring the judgment papers to the Registrar's Office. After the Registrar's Office receives the initial decision in favor of the homeowner, the homeowner's attorney must then file a 20-day notice at the ROC of the plaintiffs intent to apply to the court for an order directing payment from the Fund. In both situations, the homeowner must also submit additional material to document their expenditures and exact claim request. Currently, there is no way for a homeowner to get upfront, pre-approval for a Recovery Fund amount. Owners must wait until nearly the end of the lengthy process before the amount is set by an official order. Getting the amount "set" is very involved and frequently takes numerous submissions before ROC Recovery Fund staff agrees to a preliminary amount. Homeowners must document extensively every item they wish compensated from the Recovery Fund. They must have receipts for supplies and materials. The Registrar of Contractors Office reviews the claim amount to see if it asks for items outside or above the terms of the contract. The Registrar's Office works cases on a "first in; first out basis" (FIFO) from the time the homeowner returns a completed recovery fund 14 packet or otherwise submits Recovery Fund backup material. Unless the matter only involves escrow money issues, the Registrar schedules an inspection to look over submitted items. The inspector is required to finish his inspection, analysis and report regarding the appropriateness of a homeowners Recovery Fund claim amount within 30 days. The Registrar's inspector looks at the work and asks a number ofquestions: • Was work performed to good workmanship standards? • Were upgrades, which were not part ofthe original contract, improperly included? • If the homeowner completed work with another contractor, was it low bidder or is the documentation sufficient to show reasonable expenses? • What supplies were purchased? • Did a licensed contractor perform the work? Only actual damages are recoverable. Some items are disallowed. According to A.R.S. §321121, homeowners cannot use a handyman or unlicensed contractor unless the total job stays below one thousand dollars. Additionally, homeowners cannot recover their personal labor costs from the Fund if they do the work themselves. The Fund will not pay back homeowners who expend money on legal fees, expert witnesses or other such costs. A homeowner must shoulder the burden of all legal costs, expert witnesses, cost estimates and any pain and suffering. Legal fees from Court may be recoverable via liens and court practices, but the inspector cannot count them when determining Recovery Fund charges. The inspector cannot count late fees stipulated in the contract either. Thus, even successful claims to the Recovery Fund rarely pay a homeowner for their entire loss. Homeowners are obliged to justify their replacement contractor costs. They cannot simply hire a new contractor, but must demonstrate the contractor they hire is reasonable. The Registrar's staff establishes this by telling homeowners to get three bids for the Registrar's Office to review. The Registrar's Office then issues a letter setting a proposed Recovery Fund figure. If the homeowner and the Registrar's Office agree on the amount, then the Registrar's Office waits to see if the contractor objects. Ifno one objects, the Registrar's Office certifies the amount. If the contractor or homeowner contests the amount of the claim, or if the Registrar decides to intervene, then all three groups (homeowner, contractor, ROC staff & attorneys) will go back to court. If a Recovery Fund hearing is required, the group must again wait to get on the court or hearing office calendar. This hearing will not involve questions about the merits, but will instead center on settling the Recovery Fund amount. At the Recovery Fund hearing, a judge hears the financial issues, determines the facts, then makes the payment decision and issues a directive to payout. About three weeks later, the State Treasurer issues a check. The Recovery Fund has further limitations. As said before, homeowners may only recover a maximum of $30,000 per residence even though their losses might be greater than this limit. 15 Only actual damages are recoverable. Attorney fees, expert witness fees, upgrades not stipulated in the contract, personal injury claims or consequential damages are examples of items normally not recoverable via the Recovery Fund. Once the Recovery Fund closes to a homeowner because their claim exceeds the individual limit or total limit, the owner has little recourse. They can hire an attorney to go to court to seek a judgment to recover their unpaid losses or write off the loss. If the contractor has no assets to lien or insurance, the homeowner is simply out the money. Registrar of Contractor staff checked the fund a year ago regarding the question, "Do any complainants go away unpaid due to recovery fund limits?" In 2006, the Registrar staff reported there were only two incidents where the fund maxed-out and only one occasion where a homeowner was not paid. By 2007, the situation worsened. For example, in the case of the particular contractor involved with our complainants, seven families won their case, yet were totally cut off from the fund. We are aware of at least two additional contractors who performed equally badly in 2007. These contractors also financially injured consumers to a greater degree than the Fund's limit. Latter consumers from each of these cases will be denied access. Clearly, the worse a particular contractor is, the more likely the Recovery Fund will not be adequate to the task. The ROC staff said the fund is financially in good shape. It operates on a cash basis and is regularly audited. They said income exceeds expenses and the Fund has never been close to running out of money. They said they have authority to raise the levy on contractors if the fund runs low. The staff noted they actually cut the levy a number of years ago. Registrar of Contractor staff members do not view the fund as an insurance policy. They believe it is a "stopgap" if a contractor has no assets to lien. We also asked about the rationale behind A.R.S. §32-1136, requiring those who file in court to also file with the Registrar's Office in order to obtain access to the Recovery Fund. Registrar staff said the provision is geared toward verifying the legitimacy of recovery fund claims as dictated by statutes. Alternatives We spoke to the Department of Building, Fire and Life Safety because their agency also has a Recovery Fund for owners of manufactured homes. We compared the two funds. The Department of Building, Fire and Life Safety Recovery Fund does not have monetary limits like the ROC fund. Recovery from the fund is only limited to actual or compensatory damages, including costs, but excluding interest or attorney fees. While the Arizona Department of Building, Fire & Life Safety's experience with their fund illustrates that a recovery fund can work without artificially imposed limits, other states have not tried completely uncapped systems for their contractor recovery funds. 16 The Manufactured Housing Consumer Recovery Fund also does not have strict limits on handymen doing remedial work either. Manufactured home property owners can use unlicensed contractors as long as the particular task does not require a contractor's license. We looked at 13 other Recovery Funds around the United States. Utah is one of three states having a reciprocity agreement with Arizona. It has higher limits of $75,000 per residence and $500,000 per contractor for its recovery fund. However, Utah's fund is for lienholders, not homeowners. It only protects homeowners from sub-contractors who have not been paid by general contractors. Minnesota has set up a two-tier recovery fund system, either accelerated or standard. The accelerated procedure is available to those with claims under $7,500. Some states have found creative ways to manage multiple claims so that aggrieved homeowners do not go away empty-handed because of recovery fund limitations. Examples include North Carolina and Michigan. In North Carolina's case, once they become aware of more than one claim, they consolidate all the claims by stipulating a deadline via an Order of Consolidation. North Carolina has no limitation on their recovery fund, but they limit distributions to the amount of the award or 10% of what is in the fund, whatever is less. Homeowners not receiving their full allotment in one year can carry the remainder over to subsequent years and continue to make annual claims until they are fully paid their complete recovery fund award. Numerous states require general liability insurance instead of, or in addition to, recovery funds or surety bonds. Sometimes insurance or bonds are set according to the cost of the original construction contract. Insurance must be put in place before work is commenced or payments are made. In other cases, flat liability insurance amounts are required. Most frequently, these liability policies depend on the type of license, contractor net worth or average contractual values of the annual constructionagreements. The coverage typically ranges from $100,000 to $500,000. Complainants' View Homeowners view the structure of the Fund as too limited. They think the recovery amounts are set too low. They worry the overall $200,000 limit is too restrictive, given there is no quick way to stop or suspend a bad contractor. Theoretically, only six homeowners could get a full $30,000 and one homeowner a partial disbursement before the fund would max out. Homeowners believe the worse a contractor is, the more likely the Recovery Fund will be inadequate. They believe any offer to go to court for additional monies will be useless, given that fraudulent contractors would hide assets or maintain limited liability companies or corporations to limit their personal liabilities. Homeowners do not believe most Arizonans are aware of these limits. They said the Registrar's Office existence and mission statement lulled them into a false sense of security. They believe the Registrar's Office was created to protect and regulate the public's health, safety and welfare relating to construction. They thought this meant it would act as an 17 advocate to rectify verified construction wrongs committed by contractors. Yet, when the homeowners availed themselves of the system, they found no advocacy. Homeowners acknowledged that while due process is necessary, it need not be so piecemeal, nor should it take over a year. The owners believe the system should better allow for advocacy by the Registrar. They believe the Registrar's Office should more frequently become a party to the case. The Courts or the Office of Administrative Hearings can ensure parties get due process. They noted various Arizona commissions and boards become a party to cases. The licensees in those circumstances must maintain pre-set standards or face disciplinary proceedings. The owners think. the Registrar's mission statement is misleading because it indicates the ROC takes a more active roll than they do in practice. Owners believe the Registrar's Office is too passive and they relegate too much responsibility to homeowners. They think. the Registrar should more actively regulate construction licensees to make certain contractors adhere to construction standards and laws. Because the Registrar's Office declines to become a party in most cases, it means that whole segments of contracting law have no champions. Homeowners do not think their claim should compete with others in a race to see who will get a recovery amount before the fund limits stop further payouts. They think all wronged consumers, having actual losses, should be entitled to a recovery fund payment. They think this is only fair given that contractors are not paid via independent escrow account officers, but directly by consumers. In addition, homeowners complain the Fund requirements impose a cruel hardship when coupled with the provision stating homeowners must only hire licensed contractors. Owners complained that, in their experience, licensed contractors frequently refuse to bid on jobs when they stem from a prior dispute with another contractor and when there has been a complaint filed with the Registrar. Homeowners further complain it seems unfair that contractors can use the very handymen and unlicensed contractors that the homeowners are barred from using. Homeowners say these limitations box them into spending more money when they already face financial losses. They think their sweat equity should be allowed ifthe Registrar deems the amount claimed as reasonable. Homeowners think. the Registrar's Office has unrealistic expectations in regard to justifying Recovery Fund Claims. They tell of extreme difficulties finding alternative contractors willing to step into the midst of another contractor's faulty job. They view the restrictions on handymen as ironic and punitive. They ask, "How is a bad licensed contractor or his unskilled laborers, better than a good unlicensed handyman? Homeowners believe that many jobs do not require licensed workers to do the job, but are simply laborious tasks. Homeowners think they should be able to hire laborers for unskilled jobs such as clean up, unloading, paint preparation and minor landscaping. They note that 18 contractors hire such laborers to do these tasks and more. Additionally, they ask, "How can homeowner sweat equity be of no value if it gets the job done? They think that receipts and alternative contractor estimates should only be one means of determining a fair Recovery Fund amount. Registrar of Contractors View The Registrar's Office thinks the general structure, restrictions and Recovery Fund amounts are about right. They claim few people are rejected if they have valid claims. They note individuals may have damages exceeding the $30,000 individual limit, but they say the courts can be petitioned for additional re-dress in these circumstances. They watch the Fund and believe most people recover money once their Recovery Fund claim is approved. The Registrar of Contractors supported an increase to the Fund limitation amounts in 2002. The Registrar's Office said they would frequently close a case if the homeowner stops pushing the case forward. The office said it is a "complaint-driven system." Therefore, if a homeowner stops complaining, the ROC will commonly close the case. This is true even if the ROC inspector has already confirmed the contractor failed in some manner. The Registrar's Office acknowledges, "Current agency procedures for issuing and renewing licenses, investigating complaints and providing financial reimbursement through the Recovery Fund are labor-intensive and lengthy in duration." (Project and Investment Justification, Registrar ofContractors Information Management System, Dec. 2006.) The Registrar's Office does not want handymen or homeowners to be paid for labor to fix an errant contractor's work. They believe it best to keep the current requirement that a licensed contractor fix another contractor's work. The Registrar's staff said they tend to be impartial and gear their system toward ensuring due process to all parties in a case, but they infrequently become parties to a case themselves. Findings for Issue 2 Finding2A The Registrar of Contractors Recovery Fund's $30,000 individual and $200,000 total monetary limits are too low. The Fund limits were last increased in 2002. However, the value of residential real estate and the cost of building in Arizona have dramatically risen in the past five years. In many cities, single-family home prices more than doubled since 2002 [ArizonaReaIEstateNotebook.com]. Simultaneously, complaints against contractors have risen. Naturally, this means potential losses for homeowners utilizing contractor services likewise escalated. Logically, potential damage awards should rise to compensate for the increased potential losses. 19 Finding2B Low limits mean that some wronged consumers are likely to go away emp
Object Description
TITLE | Final report of investigation, Case... |
CREATOR | Arizona Ombudsman/Citizens' Aide |
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REPOSITORY | Arizona State Library, Archives and Public Records--Law and Research Library |
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TITLE | Final report of investigation, Case 20062692 |
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DATE ORIGINAL | 2008-12-12 |
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2000s (2000-2009) |
ORIGINAL FORMAT | Paper |
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Full Text | Arizona Ombudsman-Citizens' Aide Final Report of Investigation Case # 20062692 Registrar of Contractors December 12, 2008 Arizona Ombudsman/Citizens' Aide 3737 N. 7th Street, Suite 209 Phoenix, Arizona 85014 (602) 277-7292 (800) 872-2879 December 12, 2008 Hon. Bob Burns Senate President Designee 1700 W. Washington, Rm. 204 Phoenix, AZ 85007 Dear Senator Burns: Enclosed is a copy of the report of our investigation of case number 20062692, regarding the Registrar of Contractors (ROC). Nine homeowners contacted us to complain about the ROC system as it related to their Recovery Fund cases against a licensed contractor. The complainants alleged the Registrar of Contractors processed the complicated Recovery Fund complaints in an untimely manner. We substantiated the allegation and made 63 findings. Our investigation indicates that process has overwhelmed purpose at the Registrar's Office. The ROC system harms both homeowners and contractors. The State can and should do a better job by homeowners while still protecting contractors with fair and proper due process systems. Our 68 recommendations would help accomplish that goal. Thirty-six of the recommendations require legislative action. We request the Legislature consider addressing the problems we identify in the enclosed report. I hope you find this report useful. If you have any questions or comments, please do not hesitate to call me at 602-285-9136 Ext 26. I would welcome the opportunity to sit down with you to discuss the report in more detail. Sincerely, Enclosure TABLE OF CONTENTS Executive Summary Report - 17 Issues: Allegation, Introduction and Background Issue 1: Does the Recovery Fund system take too long? Issue 2: Recovery Fund Requirements - - Are the Fund's limits set too low or are other Fund requirements too onerous? Issue 3: Is the Registrar's overall process reasonable or is it too complicated? Issue 4: Are there appropriate triggers for the summary suspension of a contractor's license (as referenced in A. R. S. §41-1 092.11)? Issue 5: Can problem contractors "game the system" and avoid discipline? Issue 6: Are surety bond amounts set appropriately? Issue 7: Are monetary penalties appropriately applied against contractors found to be in violation of statutes? Issue 8: The difficult two-pronged legal and factual question: (A) When can a homeowner employ a new contractor to fix a problem? (B) When can a homeowner deny access to the original contactor? Issue 9: Contractors frequently operate as a limited liability company (LLC). What omissions in A. R. S., Title 32, relate to contractors operating as limited liability company entities? Issue 10: What is the enforcement process the Registrar of Contractor follows to ensure compliance with A.R.S. §§32-1122(B)(1)(i) and 32-1154 (A)(4) relating to workman compensation laws? Issue 11: What is the enforcement process the Registrar of Contractors follows to ensure compliance with A. R. S. §32-1154 (A)(4) governing unemployment insurance laws? Issue 12: What is the enforcement process the Registrar of Contractors follows to ensure compliance with A. R. S. §32-1154 (A)(4) governing social security? Issue 13: What is the enforcement process the Registrar of Contractors follows to ensure compliance with A.R.S. §32-1154 (A)(5) governing income taxes or any tax imposed by title 42, chapter 5, articles 1 and 4 and incurred in the operation of the licensed business. Issue 14: To what extent does the Registrar of Contractor's Office check contractor backgrounds? I -XXI page 1 page 6 page 14 page 23 page 32 page 37 page 42 page 48 page 53 page 60 page 63 page 66 page 68 page 69 page 71 Issue 15: What is the scope ofdiscipline affecting a contractor's remaining licenses once he has one license suspended or revoked? Issue 16: To what degree are general contractors required to verify whether a sub-contractor has a license in good standing with the Registrar ofContractors? Issue 17: Is it proper for the Registrar to encourage complainants to pursue cases on their own without the benefit oflegal counsel? Conclusions Agency Response page 75 page 78 page 79 page 82 LIST OF ATTACHMENTS: Exhibit A-- -Timetable A - Administrative Process to the Recovery Fund -Administrative Process Described Exhibit B -- -Timetable B - Civil Court Process to the Recovery Fund -Civil Court Process to the Recovery Fund Described Exhibit C -- Flow Chart of Process (without complications) Exhibit D -- Legal memo relating to summary suspension Exhibit E -- 2003 Auditor General Report Recommendation Exhibit F -- Bond Limits and Regulations Exhibit G -- List of the 31 States with Licensing Boards for Contractors Exhibit H -- Residential Contracting by State Exhibit I -- NASCLA states Recovery Fund Features Summary and Overview Exhibit J -- Complaint Forms, Instructions & Brochures Exhibit K -- ROC Recovery Fund Forms and Instructions Exhibit L -- Office of Administrative Hearings Information Exhibit M -- Press Clippings about Similar ROC Cases Exhibit N-Exhibit O-~ Exhibit P -Exhibit Q-Exhibit R-Exhibit S -Exhibit T-- ROC web site information regarding subject contractor ROC Contractor Brochure ROC Customer Survey Charts and Grids Office ofAdministrative Hearing Survey about Legal Representation Summary ofRecommendations References ii Executive Summary Ombudsman - Citizen's Aide Investigation of the Registrar of Contractors Executive Summary Ombudsman - Citizen's Aide Investigation ofthe Registrar of Contractors "The agency's mission is to promote quality construction by Arizona contractors through a licensing and regulatory system designed to protect the health, safety and welfare ofthe public. " Registrar ofContractors The Registrar's Office received grievances filed against a dual-licensed contractor who was accused by 25 families of wrongdoing. Nine of these families subsequently complained about the Registrar of Contractor's process to the State Ombudsman Office. The owners complained the Registrar's Office was too passive and not living up to its stated mission. The Office of the Ombudsman Citizen - Aide then conducted an investigation of the Registrar of Contractors pursuant to A.R.S. §41-1376 et seq. Essentially, we examined how well the Registrar was delivering on its mission promise. Some of the complainant homeowners initially filed with the Registrar's Office, others with the Superior Court and some filed at both locations. Each owner desired financial recovery via the Residential Recovery Fund. Access to the Recovery Fund is dictated by statutory constraints and controlled by the Registrar's Office. Homeowners in both the administrative and the civil court processes felt the Registrar of Contractors Office seemed indifferent about the length of time and difficulty of their process. Owners and contractors both complain to the Ombudsman Office that the Registrar's Office process takes too long. The contractor in this case had 25 complaints filed against him stemming from contracts dating from 2005 and 2006. After about two years, these complaint cases had gone through most of the system and were closed. Twenty-three of the complaints resulted in discipline while two complaints settled or withdrew. Nine homeowners recovered money from the Recovery Fund to compensate or partially compensate them for their loss. Yet, seven deserving homeowners, with a total of $96,515 in unrecoverable awards, went away empty-handed despite proving the contractor's guilt because the Recovery Fund limit of $200,000 was reached. Consistently the vast majorities of contractors' licenses (slightly over 90%) are highly regarded and are not involved in the complaint process. These licensees pride themselves on quality workmanship and good customer service. Regrettably, there are a still a significant number of contractors who receive a complaint. The Registrar of Contractors received 11,867 complaints in FY07 against 5,679 different licensees. In FY06, 11,974 complaints were received. About one-third of the complaints coming into the ROC are serious complaints requiring adjudication. Most of these serious complainants seek reparation from the Recovery Fund. The remaining two-thirds of the complaints are addressed relatively quickly because they are less complex. Typically, less complex complaints are fixed or resolved prior to hearings, not substantiated by the ROC, or the homeowner declines to continue. We focused our attention on the more involved complaints where complainants must avail themselves of the Registrar's full process in order to obtain Recovery Fund reparation. We looked at the Registrar's systems and identified 17 issues. The 68 reforms we are recommending intend to help both homeowners and contractors by reducing the untimely nature of the Registrar's complaint system and by clarifying vague areas of contractor regulation and homeowner responsibility. The recommended reforms also focus the attention and discipline of the Registrar's Office on the worst transgressors amongst contractors because these problem contractors give good contractors a bad name and because they are most likely to harm the public in a substantial way. Lastly, some reforms concentrate on inconsistently pursued aspects ofthe Registrar's regulatory mission. ISSUE 1- DOES THE RECOVERY FUND SYSTEM TAKE TOO LONG? See pages 6-14. The process from complaint to Recovery"Fund-payment-day usually takes well over a year. This is too long. There are two paths to the Recovery Fund. One is through the ROC and the Office of Administrative Hearings and is called the Administrative Process. The other process goes through both the Civil Court and the ROC Recovery Fund. We found: • There are 65 typical components in the Administrative Process. This translates numerically into a 43-step process, which can take 545 days even if no judicial reviews or other appeals are required. The most time-consuming aspect of the system is the hearing process. Administrative cases usually require two hearings. One hearing determines responsibility while the other determines the actual Recovery Fund amount. • There are 33 components in the Civil Court Process leading to the Recovery Fund. This translates numerically into a 29-step process generally involving approximately 123 days of interaction with the Registrar of Contractors Office, after the case is won in court. Just starting the post-court segment of the process is complicated. Prevailing homeowners must bring their original judgment to the ROC from the Court. Homeowners must then file a twenty-day notice with the ROC to say they are going back to court to ask for damage and payment orders from the judge. Again, with this system, each of the parties and the Registrar's Office must labor through two hearings. • The ROC complaint process tends to take between one and two years until final penalties are ordered, so bad contractors can continue to accumulate contracts while under inves.tigation. The slow processes for contested cases exacerbates costs and frustrations and results in a system that serves neither homeowners or contractors. Frequently, nine to twelve months pass before an errant contractor starts to experience actual discipline. Additionally, it means a bad contractor can cause significant financial damage to numerous homeowners prior to having his license suspended. For innocent contractors, it means they cannot clear themselves from being negatively categorized in the ROC web database as having an "open complaint." • Delays stem from many sources - - a) a two-hearing process instead of a one-hearing process. b) scheduling property inspections c) the Registrar's outdated computer system d) the busy hearing calendar at the Office of Administrative Hearings e) too many cases (about 3,500 +) being worked by too few people in the ROC Legal Department f) the Registrar's Office has no formal process to expedite payment out of the Recovery Fund, even if a Court has already established guilt. II • The Registrar's Office has no performance measure to track their complaint system's duration from beginning to end. Such a measure would be critical to assessing problem areas and reducing processing time. • The ROC's Corrective Work Order and the Citation are largely redundant to one another and having both notices lengthens the process. The Registrar's Office should ~ Revisit their strategic planning process. The ROC should develop a performance measure to track their complaint system's duration from beginning to end in both the administrative system and the court system. Under the current process, the administrative system typically takes 545 days or more and the court system route takes 123 days or more of interaction with the Registrar of Contractors, after the case is won in court. (Recommendation IE) ~ Request the Legislature approve enough staff for their agency so property inspections can occur within three weeks for regular cases and within two days when there are habitation or extreme hazard issues. In the current process, inspections typically do not occur until eight weeks after a complaint is filed and then it takes an additional twenty days or more for inspectors to write and distribute their reports. (Recommendation 1F) The Office of Administrative Hearings (OAH) should ~ Request more administrative law judge positions from the Legislature. They should strive to reduce the waiting times for hearing appointments relating to ROC cases to six weeks or less. It currently takes approximately three months to get into a hearing. (Recommendation 1G) The Legislature should consider: ~ Changing the Registrar ofContractors process by establishing a diverse group of stakeholders to analyze the process and recommend changes. The Registrar's administrative processes for complaints need to be reduced. The current process takes too long and frustrates homeowners, contractors and even the Registrar's staff. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the administrative system and suggest further refinements. The Registrar's Office should participate in the evaluation too. (Recommendation lA) ~ Amending statutes so construction cases contested administratively via the Registrar of Contractors and the Office of Administrative Hearings have the Recovery Fund claim stipulated in the original case determination and order. This would eliminate the current, time-consuming exercise requiring two proceedings. Under such a scenario, complainants would request a specific Recovery Fund amount when they file their complaint. Subsequently, if ROC inspectors verified the complaint, the inspectors would issue corrective work orders stipulating not only what needs to be fixed/accomplished, but also their evaluation of the claim amount. Contractors would still have their due process rights because they could challenge the claim in the main hearing as to both responsibility and amount. (Recommendation IB) ~ Amending construction statutes so cases contested in court have the Recovery Fund claim amount stipulated in the original case determination and order. This would eliminate the current time-consuming exercise where homeowners initially win in court, announce the fact to the ROC, wait twenty or more days and then return to court to ask the judge to direct the ROC to make a Recovery Fund payment. (Recommendation 1C) III »- The Registrar's process for Recovery Fund complaints originating in the courts need to be reduced. The current system takes too long. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the ROC process for judicial complaints and suggest ways to speed up the process. The Registrar's Office should participate in the evaluation too. (Recommendation ID) »- Amending statutes to streamline the Inspection to Citation process. The inspection notice could set an inspection date, inform the contractor about the complaint (via a copy of the actual complaint) and suggest the contractor attempt to work out the problems prior to the inspection. It could give the contractor notice that if the inspector verifies workmanship or other problems at the future inspection, then an official citation will be issued. The current process usually has three written notices at its front end - a Notice of Inspection, a Corrective Work Order and then a Citation. It would be more efficient if this three-step notice process were reduced to two. (Recommendation 1H) »- Adopting a statute, similar to Minnesota's Statute §326-975, to accelerate payment out of the contractor's recovery fund under certain circumstances. (Recommendation II) »- Instructing the Office of Management and Budget to closely track and report the progress of the Registrar of Contractor Information Management System (ROCIMS) computer project to ensure it stays on course and has the necessary resources to be successfully completed. (Recommendation IJ) ISSUE 2- RECOVERY FUND REQUIREMENTS - - ARE THE FUND'S LIMITS SET TOO LOW OR ARE OTHER FUND REQUIREMENTS TOO ONEROUS? See pages 14 - 23. The Recovery Fund's reparation limits are set too low and getting through the claim process is too onerous. • The Fund's $30,000 individual and $200,000 total monetary limits are too low. They were last increased in 2002. Because of the limit caps, some wronged consumers are likely to go away empty-handed or only partially compensated for their losses. Homeowners may only recover a maximum of $30,000 per residence, even though they might loose much more. Once the Registrar disperses $200,000 against a particular contractor, the fund is closed and the Registrar cannot pay more claims against that contractor's license. Homeowners might prove the contractor guilty, yet receive nothing from the Recovery Fund because they happen to be a homeowner who is in line after the fund is closed. Alternatively, homeowners might face actual losses from a contractor's bad acts far exceeding the Recovery Fund's $30,000 individual limit, but have no effective means to collect the monies. • Most complaints require lengthy due process procedures before contractors face discipline. Faster processes like summary suspension and administrative suspensions exist,.but they have many restrictions and thus, are limited in use. • Only actual damages are recoverable. The Fund will not pay back homeowners who expend money on legal fees, expert witnesses or other such costs. • It is too complicated to establish the recovery fund request. The Registrar's Office only gives generalized guidance in developing a homeowner's justification for their recovery fund request. They do not have specific estimating benchmarks for homeowners to go by. IV Homeowners are entirely responsible for cost estimates for work, supplies or equipment. The Registrar staffhas essentially "veto authority." • Estimates are frequently very difficult for homeowners to obtain because other contractors (replacements) tend to shy away from homeowners who have filed with the ROC. • There is no way for a homeowner to get pre-approval for cost estimates. Either homeowners wait for the entire ROC process to finish (typically over a year) or they get estimates, proceed with repairs and hope they will not be second-guessed and rejected. • There is almost no way for homeowners to be compensated for their own sweat equity or for the work of a handyman. • We found other states found creative ways to avoid over extending their recovery funds. They will consolidate claims, limit distributions to proportional amounts per year or allow carryover reparations. The Registrar should: ~ Develop ways to estimate reasonable construction costs in instances where homeowners cannot. The Registrar's Office could issue a preliminary estimate of the value of labor, equipment, supplies and material that would serve as a suggested floor amount for the recovery fund amount. Homeowners could accept this floor amount or get specific estimates. (Recommendation 2C) ". Develop criteria to define and pre-approve some situations when it is reasonable to accept estimates for homeowner "sweat-equity." (Recommendation 2D) ". Examine how other states manage multiple claims against one contractor and develop a like proposal for the Arizona Legislature to consider. (Recommendation 2F) The Legislature should consider: ~ Amending construction statutes to increase individual Recovery Fund claim limits from $30,000 to $50,000. (Recommendation 2A) ". Amending construction statutes to increase the total claim limit against a contractor from $200,000 to $500,000. These changes would compensate or partially compensate more homeowners than allowed under the existing limits. (Recommendation 2B) ~ Removing the $1000 limit found in A.R.S. §32-1121 so that the total cost of the contract is not a factor when using a handyman, just the handyman's total labor charges as a portion of the project charge. (Recommendation 2E) ISSUE 3- IS THE REGISTRAR'S OVERALL PROCESS REASONABLE OR IS IT TOO COMPLICATED? See pages 23-32. The Registrar's process is confusing and too complicated. • The current system is dependent on homeowners' continued pressure on the Registrar to bring errant contractors into compliance with statutes and rules regulating contractors. If a homeowner does not keep pushing for justice, the Registrar will frequently close a case. This is true even if the Registrar's Office confirms the contractor failed to adhere to contracting laws or workmanship standards. • The ROC approach is too segmented. The ROC employees only seem to know about their section. Yet the contractors and homeowners seek a bottom-line "big-picture view" so they v can understand what to expect and what is required. Both homeowners and contractors complain to the Ombudsman Office they are frustrated by piecemeal or contradictory communications from the Registrar's Office. Homeowners and contractors see the complaint process from the standpoint of how long they are mired in the total process, while the ROC staff members speak in terms of how long the case has been in their particular segment (e.g., inspection, citation, legal hearing, order, recovery fund justification, recovery fund hearing, and warrant payoff). • The ROC rarely becomes a party to a case. • The Registrar's Office fails to consistently pursue many aspects ofits regulatory mission. For example, the Registrar might have verified evidence a contractor violated construction laws and harmed a family, yet the ROC will close the case just because the homeowner tires of the fight. We also found the Registrar's Office inconsistently issues fines even in cases where contractors have been suspended or revoked under provisions making financial penalties applicable under law. Additionally, we found the Registrar's Office would receive information a contractor failed to make required workers compensation payments, tax payments and unemployment insurance payments, yet not act on the information.. • Specific to, this case, the contractor in question was accused of not paying workers compensation as required under contracting licensing laws. After the Registrar's Office failed to refer the matter or otherwise investigate, homeowners contacted a State Senator and she asked the Industrial Commission to investigate. The Industrial Commission confirmed the contractor violated the law and issued a $1,000 fine. The Registrar's Office database on the web makes no mention of the violation or the fine. In fact, we could not find any mention of similar infractions by any licensed contractor. • Consumers and contractors say they find the process confusing. They want more cohesive and comprehensive instructions and they want the ROC to flow chart the process so they have a better understanding oftheir deadlines and options. • We informed the Registrar their web site contained some obsolete matrixes, FAQ points, descriptive passages and other misleading information. The Registrar's Office made many corrections and improvements to their web site in the past year. However, the Registrar's contractor database still needs refinement. The database does not disclose the date it was last updated and only displays partial information about contractors' complaints and discipline. • Imaging ofdocuments takes too long. • Case timeframes are not posted on the Internet or elsewhere in public view. As a result, the parties to a case often are not sure what more is required of them, if the ROC has received documents or if a delay is avoidable. • The Registrar's Office fails to supervise or actively monitor settlements between homeowners and contractors stemming from complaints. The ROC closes cases and marks them on the web as "settled" when it is not clear whether the parties will abide by the terms of the agreement. This implies a firmer resolution than what actually exists. • Lastly, we reviewed the survey form and found its design fails to elicit enough feedback for the organization. The Registrar's Office should: ~ Augment their written instructions to make them more complete so consumers and contractors are less confused about their processes. They should flow-chart the process and show each of VI the parties what options are available to them at each possible stage. They should create a consumer handbook and a recovery fund guide. (Recommendation 3C) » The Registrar's Office deserves kudos for recently implemented web site improvements. The site is much more informative and user friendly than what was available a year ago. The Registrar should continue to improve their main web site. The Registrar's web site should display the status of complaints or link to the Office of Administrative Hearings case information. Registrar staff should have quick research options allowing them to point consumers to online, timesaving data and features. (Recommendation 3D) » Put more information into their licensed contractor database and web display. They should note the date the infonnation was last updated (Recommendation 3E) » Consult with Arizona's Government Information Technology Agency (GITA) and develop a project to expand their imaging process so that it is faster and more all encompassing. The current imaging process takes too long, keeps files unavailable and is not comprehensive enough. (Recommendation 3F) » Post case status and timeframes on their web site. (Recommendation 3G) » Monitor settlements of contested cases between homeowners and contractors. They should automatically re-open tabled complaints once they get notice either party defaulted on the deal. (Recommendation 3H) );- Develop another tenn or phrase to describe situations where settlement agreements are in play. They should not display the word "settled" until the matter is fully closed and the parties live up to the tenns ofthe settlement. (Recommendation 31) );- Improve their survey. The survey should identify whether or not the respondent is a contractor or homeowner, whether or not the case went to the recovery fund stage and how long the complaint took to resolve (date complaint was opened to date case was closed). (Recommendation 3J) The Legislature should consider: );- Adding 3 to 4 case contact staff to the ROC's organization so that each case has a single point of contact for all parties. (Recommendation 3A) );- Amending statutes to make the Registrar a party to the case if the State has a clear interest. (Recommendation 3B) ISSUE 4- ARE THERE APPROPRIATE TRIGGERS FOR THE SUMMARY SUSPENSION OF A CONTRACTOR'S LICENSE (AS REFERENCED IN ARIZONA REVISED STATUTES §41l092.11)? See pages 32- 37. We found the Registrar's Office historically avoided invoking the provision that summarily suspends a contractor's license, but a new law is likely to make it easier to issue summary suspensions. • Historically, provisions in Title 41 have guided the Registrar's Office. A.R.S. § 411092.11 (B) says, "Revocation, suspension, annulment or withdrawal of any license is not lawful unless, before the action, the agency provides the licensee with notice and an opportunity for a hearing in accordance with this article. If the agency finds that the public health, safety or welfare imperatively requires emergency action, and incorporates a finding to that effect in its order, the agency may order summary suspension of a license pending VII proceedings for revocation or other action. These proceedings shall be promptly instituted and determined." • Criteria in statute, rule or policy as to what constitutes grounds for Summary Suspension resulting from concern for "public health, safety or welfare imperatively requiring emergency action" as referenced in A. R. S. § 41-1092.11(B) are not defined, so the Registrar was reluctant to use it. However, the 48th Legislature, Regular Session passed and the Governor approved Senate Bill 1417. It refines Arizona Revised Statutes Title 32 relating to contractors. A.R.S. §§32-1171(A) and 32-1171(C), "General Remodeling and Repair Contractors" establishes two criteria where the Registrar may issue a summary suspension -one in the case of a contractor failing to obtain workers' compensation pursuant to Title 23, Chapter 6, Article 4 and the other when the Registrar believes an investigation indicates the public health and safety requires immediate action. • Senate Bill 1417 also addresses abandonment complaints. Contractors who are the subject of five or more substantiated complaints lose their right to take on more work until they get below five complaints in a year's time. • SB 1417 did not establish an expedited investigatory or repair process in cases where there are threats to public health and safety. For a summary suspension provision to be effective, fast intervention is needed at both points. • There is no process to expeditiously determine whether a situation rises to the level where the Registrar can confirm a threat ofdanger to public health and safety requires immediate action. • The Auditor General recommended the Registrar's Office define summary suspension rule criteria in 2003, and the Registrar's Office agreed, but the Registrar's Office has not developed the definition to date. The Legislature should consider: >- Creating statutory criteria to specify situations where the Registrar's office is required to perform expedited inspections (within two working days) when a homeowner credibly alleges a public health, safety or welfare concern exists as the result of faulty acts committed by their contractor. (Recommendation 4A) >- Stipulating that, that in circumstances where the Registrar's Order confirms a public hazard or active safety issue directly attributable to an error by the contractor, the contractor should be required to fix the hazard within a 24-hour period or some other brief time or deliver specific evidence to counter that it is his responsibility. The hazard should be grave enough to potentially cause death, serious bodily harm or prevent habitation. Failure to comply with both of these provisions should result in a default finding releasing the homeowner from his obligation to continue to work with the initial contractor. However, it should not release the contractor from existing damage claims. (Recommendation 4B) ISSUE s- CAN PROBLEM CONTRACTORS "GAME THE SYSTEM" AND AVOID DISCIPLINE? See pages 37~ 42. We found that bad contractors can exploit the ROC system. • The contractor in these cases illustrates the point. He had 25 complaints filed against him in the past two and half years. As of April 16, 2008, the ROC reported these cases were finally closed. Eight families received payments from the Recovery Fund. The ninth and final VIII family was assigned only get a partial Recovery Fund payment of $24,359.66 because the Recovery Fund limits total payouts on anyone contractor to the sum of $200,000. Despite proving the contractor's guilt, seven deserving homeowners, with a total of $96,515 in unrecoverable awards, went away empty-handed because the Recovery Fund limit was reached. • It has been almost impossible to suspend a contractor in less than nine month's time unless the contractor had an administrative problem (e.g., Loses his bond or loses his corporate status because the Corporation Commission dissolved him). This is even true when there are multiple complaints against a contractor. A bad contractor can do a lot of harm in 9 months. While it remains to be seen in practice, the new changes to A.R.S. §32-1171 will likely reduce the time in situations where contractors fail to maintain their workers compensation payments or create a situation where public health and safety are at risk. • Contractors, unlike realtors, do not have standardized contracts. Bad contractors fail to specify timeframes, materials and payment schedules among other things. The absence of such requirements enables badly behaved contractors to exploit unwary homeowners. • Contractors can stall the process by many means. • Complaints closed after a corrective work order, but before an administrative hearing, largely allow errant contractors to thwart the discipline process. • Complaints closed before an inspection and issuance of a corrective work order, thwart the discipline process even more. The ROC web does not display or count such cases. • Problem contractors, who consistently fail to adhere to rules or statutes, skirt the penalty phase by fixing problems shortly before or soon after the Registrar's Office issues corrective work orders. Under these scenarios, contractors may commit multiple violations, but never face a consequence from the State for creating the problem in the first place. • An administrative suspension does not allow a contractor to work, yet it does not automatically release a homeowner from the obligation of working with the contractor. The homeowner must pursue the contractor in an individual complaint and win his case before he is assured that he can terminate the contract. The Registrar's Office should: ~ Create a rule requiring that residential contractors give homeowners a consumer handbook with all formal construction bids. The handbook would list elements common to good construction contracts and display a collection of various sample contracts. It should tell homeowners how to check the record of a contractor and how to document interactions and/or disputes with their contractor. The Registrar's Office should develop the handbook. (Recommendation SA) ~ Set up their official public record posting about each contractor licensee to display the number of times the Registrar's Office verified a complaint against a contractor and the nature of each complaint. It should also indicate the filing date of the complaint, how the complaint was handled and at what stage it was resolved/closed (e.g., before inspection, after corrective work order, after citation, after hearing, after official order, after re-hearing). (Recommendation SC) ~ Display in contractors' records the number of times the Registrar's Office had to issue a corrective work order or citations. (Recommendation 5D) The Legislature should consider: ~ Authorizing automatic criteria in statute, that make contracts voidable, thus gIvmg homeowners a release option in situations where licensed contractors are administratively suspended and fail to clear the suspension after ten to twenty days. (Recommendation 5B) IX ~ Authorizing automatic trigger points in statute that prohibit contractors, who have too many open complaints, from taking on more work until they resolve the complaints or they fall back to a lower number. If a contractor has a defined number of open, confirmed complaints filed against him in a certain period, he should not take on new business until the number of such complaints fall back below the trigger number. SB 1417 addressed the issue of contractors with excessive complaints, but it focused only on contractors who abandon five or more jobs. Contractors who gamer numerous complaints due to poor workmanship are no better than those who abandon jobs. In a sense, they are worse because such job sites are sometimes left in worse shape than before the work began. The natural trigger to limit contractors with an elevated level of confirmed complaints would be the Recovery Fund maximum value. In other words, once confirmed claims against a contractor exceed the total possible Recovery Fund limit, it would block the contractor from taking on new business until the complaints are resolved to the point the Recovery Fund limit is not in jeopardy. With current fund limits, this would mean a contractor could face six full claims before they would be hit the trigger point and have to stop accepting new work. (Recommendation 5E) ISSUE 6- ARE SURETY BOND AMOUNTS SET APPROPRIATELY? See pages 42 - 48 We found that the surety bond system in Arizona is not adequate: • Bond amounts are set low in Arizona ($5,000 to $15,000). Contractors usually purchase their bond for about 3% ofthe face amount, so most pay less than $500 for their bond. • Bonds are so inexpensive (usually less than $500); their protection fails to concern their purchasers (contractors). Contractors usually purchase their bond for about 3% of the face amount, so most pay less than $500 for their bond. • The surety bond system implies more than it delivers. Because bond amounts are low, they tend to suffice for only one or two creditors. Usually homeowners with claims against contractors do not get to collect on the bonds because sub-contractors have already done so. Once the face amount of a bond is used, the bonds have no value until the contractor pays to have them financed again. In this way, it is different from insurance. • Consumers think that when a contractor is bonded, they are safe from monetary loss at least to the extent of the bond amount. This is not true. Bonds are not insurance and once claimed, they are not available to other wronged parties. Even if one is lucky enough to claim a bond, the reimbursement might not fully cover the loss due to the low bond face amount. None-theless, the bond system tends to reduce the financial pressure on the Recovery Fund. • The Registrar's Office is not legally bound to inform consumers about the possibility of collecting on a financial loss (resulting from a contractor) by way of claiming a contractor's bond. Sometimes bonds are available, yet go unclaimed. Homeowners are ignorant of this fact so they fail to claim the bond. • One way to rein in contractors more quickly is to claim a contractor's bond. If the claim is paid and the bond used up, then the ROC administratively suspends the contractor until he replaces the bond. Yet, because the Registrar's Office does not inform complainants of this, homeowners do not know that reparation money other than the Recovery Fund might be available to them. x • Twenty-three states require bonding and the majority of them set their bond minimums at a higher amount than Arizona. The other states' bonds tend to have amount~ starting at $10,000 or $15,000. [See Exhibit G, "Residential Contracting by State] Some states, such as Iowa and South Dakota, have performance bonds. • Contractor liability insurance requirements are lenient in Arizona. Neither errors and omissions nor general liability insurance policies are required for residential Arizona contractors. • Each state handles regulating contracting and residential construction risk differently. Twentyone states require various forms of insurance. Most of these states have minimum coverage amounts in the range of $150,000 per occurrence and $500,000 in the aggregate. Approximate costs are $1,300 annually for $500,000 in aggregate coverage and about $1,500 for one million in coverage. • Some states require bonds and insurance. • Eighteen states require contractors to submit statements of financial condition or credit reports with their license renewals. Fourteen states require Recovery Fund participation as a form of insurance. [See Exhibit G, "Residential Contracting by State] Financial information is an important preventative measure to stop contractors from engaging in more business than they can financially back and to thwart bad contractors from engaging in fraudulent schemes. The Legislature should consider: );. Having fewer bond levels and set the bond amounts to $15,000 for a single license and $30,000 for a dual license if a contractor does $500,000 or less in annual work. For contractors with annual contracts exceeding $500,000, the bonds should be $25,000 for a single license and $50,000 for contractors with dual licenses. (Recommendation 6A) );. Requiring contractors to have liability insurance. They could benchmark to the average amount of coverage required in the twenty-one states that mandate liability insurance. (Recommendation 6B) );. Amending contracting statutes to require the Registrar's Office to obtain more financial information on prospective contractors. A component of this could be requiring contractors to demonstrate proof of financial accountability when submitting applications or renewals. The Legislature could look at what states such as Alabama, Arkansas, California, Florida, Hawaii, Idaho, Louisiana, Maryland, Michigan, Mississippi, Nevada, New Hampshire, North Carolina, South Carolina, Tennessee, Utah, Virginia and Wisconsin require of their contractors to prove financial accountability. Professional accountants should review and attest to these statements prior to their submittal to the Registrar's Office to prevent contractors from submitting untruthful statements. The Registrar should use the financial statements to set each contractor's bond amount. Arizona legislators could examine Florida, Utah, Nevada or California methodologies as examples of jurisdictions with stronger contractor applicant requirements. (Recommendation 6C) );. Amending statutes relating to contractor bonds and complaints to require the ROC to notify every complainant, upon the filing of their complaint, whether or not the contractor's bond is available or has been claimed. The ROC already sends a notification to both parties acknowledging the complaint and announcing the date of property inspection. They should note the bond amount and status on the notification form and explain the bond claiming process too. The form would then serve three purposes - - as a receipt to confirm the ROC received the complaint and notice to the contractor, as a notice about the date of the property inspection and as notification ofthe bond amount and availability. (Recommendation 6D) XI ISSUE 7-- ARE MONETARY PENALTIES APPROPRIATELY APPLIED AGAINST CONTRACTORS FOUND TO BE IN VIOLATION OF STATUTES? See pages 48 - 52. The Registrar's Office is not tracking their penalty program well. We noted: • Two statutes [see A.R.S. §§32-1154(a) (23) and 32-1154(a) (18)] direct the Registrar's Office to levy penalties. • There was not evidence that penalties against errant contractors are consistently levied when applicable [under A.R.S. §§32-1154(a) (23), Failure to Take Appropriate Corrective Action; or 32-1154(a) (18), Contracting While in Suspended/Inactive Status]. • The ROC does not issue penalties if complainants resolve their complaint. Contractors might be guilty and have violated A.R.S. §§32-1154(A)(23), yet if they later manage to satisfy the complainant, they tend to avoid hearings, official findings and the whole penalty phase. It takes a long time for penalties to be issued and there are no instances where penalties accrue automatically under certain conditions. • We did not see comprehensive results of current collection activities. We saw one reference to penalties in a spreadsheet taken from a prior Auditor General audit (2003), but that was it. • The Registrar of Contractor's Posting List appears in two-month increments on the Registrar's web site. The PDF files only list the contractors who lost their licenses due to failure to pay civil penalties. The lists are not comprehensive, but cover weekly summaries ofROC activity. The posting does not give overall tabulations of the number and amount of penalties levied or collected. • We found no evidence the Registrar's Office receives notice when city or county inspectors tag a property for failing to adhere to local building code criteria. • The Registrar's Strategic Plan does not have a performance measure to track and report penalties authorized and collected each year. • The Registrar's staff failed to produce penalty data for us, despite having approximately a year and a half to generate the information. The Registrar should: >- Have a performance measure to track and report penalties assigned and collected each year. (Recommendation 7A) The Legislature should consider: >- Establishing triggering criteria in statute to facilitate the issuance ofpenalties immediately if a contractor fails to respond (defaults), otherwise completely fails to fix items listed on a corrective order with no explanation or fails to ask for a compliance hearing. (Recommendation 7B) >- Requiring contractors forward inspection reports to the Registrar's Office when local government building inspectors cite the contractor for failing to build to code and the contractor takes longer than twenty-one days to make corrections. The statutory change should then require the contractor follow-up with a notice to the Registrar's Office once they have fixed the items listed as problems in the inspection. (Recommendation 7C) XII >- Refining the statutory criteria for detennining when the Registrar must pursue disciplinary action, independent of complainants' individual settlements, with contractors. (Recommendation 7D) ISSUE 8- THE DIFFICULT TWO-PRONGED LEGAL AND FACTUAL QUESTIONS: (A) At what point can a homeowner move on to a new contractor to fix a problem? (B) At what point can a homeowner rightfully deny access to the original contaetor? See pages 53 - 60. We found: • Neither statutes nor rules clearly answer these questions. What is apparent is the current system is confusing and takes too long. Statute nor rule definitively list what steps a homeowner should take, nor how long they should wait, to demonstrate their good faith attempt to address disputed matters with the original contractor. Waiting nine to sixteen months to make repairs is not a reasonable option for most homeowners. Yet there are no plain answers for homeowners. Instead, the laws offer owners only general guidance. It will take months before a judge or the Registrar issue a ruling. The laws encourage homeowners to make an educated guess whether or not to proceed. Even the plain language found in original contracts is not enough because contractors can contend the homeowner somehow prevented them from fulfilling the contract. • No one is empowered to give them a definitive answer or permission. The ROC workers could not guarantee that claims of abandonment would hold up despite weeks or months of no response from the contractor. The Registrar's Office could not guarantee the owners that the cost to repair the errant work would be reimbursed even though building inspectors verified the work was faulty. The owners ask, "What citizen in the state would be willing to live in a house waiting for months at a time where wiring has started one fire and threatened to start another, where there is no air conditioning in summer, or where the back end of their. home was exposed to the elements, burglars and pests?" The owners thought some circumstances so poisoned the relationship that the system should have a mechanism to more quickly deal with such a breach. • The existing laws assume homeowners can wait months before fixing what is broken with their home. In many instances, it is not reasonable to delay repairs. Delays might create unhealthy conditions, leave inherent hazards or swell a homeowner's liability. It does not seem reasonable to make homeowners wait for the better part of a year or even longer for a definitive response. The present system fails to deal with reasonable habitability issues. The system takes a substantial amount of time if the contractor even minimally contests the problem. It invites bad actors to "game the system." There should be criteria where the homeowner is given, in limited circumstances, emergency authority to proceed with specific repairs. The Legislature should consider: >- Going beyond the changes they made via Senate Bill 1417 relating to summary suspensions and define statutory criteria to have expedited inspections and corrective work orders in XIII limited situations where the Registrar's Office confirms the original contractor's error, negligence or abandonment created an acute hazard. Acute hazards could be listed in statute. Example ofacute hazards are: • Faulty electrical work threatening an immediate fire or electrocution danger. • Disconnected essential services such as electric/gas/water (disconnected for longer than three days). • Inoperable cooling or heating apparatus when ambient temperature reaches higher than 90 degrees or lower than 45 degrees Fahrenheit and alternative heating or cooling mechanisms are not available for the structure. (disconnected for longer than three days) • Poorly engineered roofs, walls or bearing beams, which threaten collapse. Homeowners should be allowed to petition for quick relief in such scenarios. Petitions to expedite should have at least three components. The homeowners would need to demonstrate to the satisfaction of the Registrar's Office that the problem poses a threat of serious bodily injury, violates health codes or otherwise make the house uninhabitable until fixed. Furthermore, the property owner would need to show that the problem was the result of negligence or error committed by the contractor's company and not a planned event (e.g., a pre-agreement where both parties, know and agree that repairs will be so extensive, the property owner must vacate the property). Lastly, the contractor must have been given at least three days to make repairs. The contractor would still have the right to contest whether or not they are at fault through the regular course of due process, however, the matter would then just be about the fault determination and possible Recovery Fund or other reparations. This recommendation should be addressed when Recommendation 4A and 4B, relating to summary suspension, are addressed. (Recommendation 8A) >- Defining statutory criteria to allow homeowners to hire a new contractor when a contractor abandons and does not attempt to finish a job. No homeowner should have to wait past the repair time stipulated by the Registrar's Office in the corrective work order. From that date on, the homeowner should be free to hire a different contractor to resolve the problem unless the contractor can provide credible evidence the homeowner barred him from accessing the job in violation ofROC directives. If the contractor produces credible evidence, then the matter must proceed through regular due process channels. However, if the contractor is silent or provides no rationale to the Registrar to explain how the property owner prevented work, then the Registrar can permit the property owner to hire a different contractor. Senate Bill 1417 focuses on stopping contractors who have five or more claims of abandonment from taking on more work, but it does not help homeowners who are already the victim of abandoned projects. Something should be done for these types of cases too. Enacting the recommendation would still give the contractor the right to contest whether or not they are at fault through the regular course of due process, however, the matter would then just be about the fault determination and possible Recovery Fund reparations. (Recommendation 8B) XIV ISSUE 9- CONTRACTORS FREQUENTLY OPERATE AS A LIMITED LIABILITY COMPANY (LLC). WHAT OMISSIONS IN ARIZONA REVISED STATUTES, TITLE 32, RELATE TO CONTRACTORS OPERATING AS LIMITED LIABILITY COMPANY ENTITIES? See pages 60 - 62. • In the course of our review, we noticed instances where limited liability company (LLC) references, in statutes governing contractors, were inconsistent and ambiguous when compared with corporate and partnership references. There are five omissions in A.R.S. Title 32 relating to LLC entities. In many cases, the statutes were silent about limited liability company requirements, yet imposed requirements on partnerships, corporations and sole proprietors. In the context of this investigation, it matters because contractors frequently operate as a limited liability company. The five statutes are A.R.S. §§32-1101, 32-1122, 321151, 32-1156 and 32-1166 relating to contracting, should be updated to clearly reflect that they apply to limited liability companies too. • The Registrar's form mentions limited liability companies, but it asks for a list of corporate officers and directors. Limited liability companies do not have corporate officers or directors, they have "members" or "managers" or "managing members." The form should ask LLC entities to list all managers and list members who hold a 25% interest in the company. • Further, the Registrar's form asks limited liability companies to file a copy of their limited liability company agreement file at the Corporation Commission, but no such filing exists. The Corporation Commission does not require limited liability companies to file their agreements. The Registrar's Office should be asking for the limited liability company's "articles oforganization" in order to accurately reflect the proper legal terms. The Registrar's Office should: ~ Correct their application form to use the proper legal terminology for limited liability company leadership (members, managers, member-managers). (Recommendation 9B) ~ Correct their application form to specify the proper legal terminology relating to the original organization of limited liability companies. Limited liability companies file "Articles of Organization" with the Corporation Commission, not "Operating Agreements." (Recommendation 9C) The Legislature should consider: ~ Amending the five identified statutes relating to contracting (A.R.S. §§32-1101, 32-1122, 321151, 32-1156 and 32-1166), to clearly reflect that they apply to limited liability companies too. (Recommendation 9A) ISSUES 10, 11, 12 AND 13 -- DOES THE REGISTRAR FAIL TO ENFORCE CONTRACTING STATUTES RELATING TO WORKERS COMPENSATION, UNEMPLOYMENT INSURANCE, SOCIAL SECURITY PAYMENTS AND OTHER REQUIRED TAXES? See pages 63 -71. The Registrar of Contractors enforcement process is inconsistent relating to: • A.R.S. §§32-1122(B)(1)(i) and 32-1154 (A)(4) relating to workman compensation laws; xv • AR.S.§32-1154 (A)(4) governing social security; and §32-1154 (A)(4) governing unemployment insurance laws; • and AR.S. §32-1154 (A)(5) governing income taxes or any tax imposed by title 42, chapter 5, articles 1 and 4 and incurred in the operation ofthe licensed business. The Registrar' Office frequently fails to pursue contractors in instances where they have reason to believe a contractor has violated one of these laws. It is not clear what propels the Registrar's Office to pursue a contractor for violation of these statutes or what leads them to detennine not to follow up. The ROC managers say they are complaint-driven, but business obligations such as workers compensation, unemployment insurance or tax payments by contractors are not the concern of homeowners. A number of states require contractors to prove with their applications and renewals that they are current with their workers compensation claims, unemployment insurance payments and taxes. Arizona The management adage, "What gets tracked, gets done" is applicable. The ROC does not actively track whether or not contractors maintain their obligations to the workers compensation fund, unemployment, social security or other transaction taxes. Relating to Contractors Failing to Pay Workman Compensation The Registrar's Office should: ~ Develop formal mechanisms (e.g., interagency agreement) to receive and deliver information related to workers compensation violations to the Industrial Commission. For example: • Upon the ROC receiving infonnation or otherwise determining a contractor may not have adhered to workers compensation laws, the ROC should be obliged to inform the Industrial Commission of the allegation. . • Similarly, the Industrial Commission should inform the Registrar's Office when they substantiate a contractor has failed to adhere to workers compensation laws. (Recommendation IDA) ~ The Registrar should develop rules that automatically trigger a summary suspension of a licensed contractor upon the Industrial Commission substantiating the contractor's failure to adhere to workers compensation payment laws. The finding should trigger AR.S. §321171( A) and summarily suspend the contractor's license. This would be similar to the Registrar's process when the Corporation Commission notifies the Registrar that a contractor's corporation or limited liability company has been dissolved. [NOTE: The Legislature ordered the Registrar to develop rules to implement SBI417.] (Recommendation lOB) ~ Develop a performance measure to reflect their activity and enforcement of AR.S. §§32I I22(B)(l)(i) and 32-1154 (A)(4) relating to workers compensation laws requirements for licensed contractors. (Recommendation IDC) Relating to Unemployment Insurance The Registrar's Office should: ~ The Registrar's Office should collaborate with the DES to develop formal mechanisms to receive information related to unemployment insurance violations from the Department of Revenue. (Recommendation l1A) XVI ~ Develop a performance measure to reflect their activity and enforcement of A.R.S. §32I I54(A)(4) relating to unemployment insurance payment requirements oflicensed contractors. (Recommendation lID) Relating to Social Security Taxes The Registrar's Office should: ~ Develop formal mechanisms to notify the Internal Revenue Service when the ROC receives or develops information indicating a contractor may have violated social security obligations. The ROC should be obliged to inform the Internal Revenue Service of the allegation and facts. (Recommendation 12A) Relating to income taxes, withholding taxes or any other tax imposed on contractors and incurred in the operation of the licensed business. The Registrar's Office should: ~ Developing formal mechanisms (e.g., an interagency agreement) to receIve and deliver information related to tax violations with the Department of Revenue. For example: • Upon the ROC receiving information or otherwise determining a contractor may not have adhered to workers compensation laws, the ROC should be obliged to inform the Department of Revenue ofthe allegation. • Similarly, the Department of Revenue should inform the Registrar's Office when they substantiate a contractor has failed to adhere to workers compensation laws. (Recommendation 13A) ~ Develop a performance measure to reflect their activity and enforcement of A.R.S. §32- 1154(A)(5) relating to tax requirements of licensed contractors. (Recommendation 13C) Relating to Unemployment Insurance The Legislature should consider: ~ Adjusting Title 32, concerning licensed contractors, to automatically trigger an administrative suspension of a contractor's license at the ROC once DES substantiates the contractor failed to adhere to unemployment insurance laws. (Recommendation lIB) ~ Adjusting Title 32 concerning licensed contractors to require the Registrar's Office to collect updated unemployment insurance payment information from all contractors. Essentially, it would be a declaration by contractors (with employees) that unemployment insurance provisions were met. It could be a component of the biennial licensing process. (Recommendation 11 C) Relating to Social Security Taxes The Legislature should consider: ~ Adjusting Title 32 concerning licensed contractors to require the Registrar's Office to collect updated social security payment information from all contractors. Essentially, it would be a declaration by the contractor that his business has met its social security obligations. It could become a component of the existing biennial licensing process. (Recommendation 12B) Relating to income taxes, withholding taxes or any other tax imposed on contractors and incurred in the operation of the licensed business. The Legislature should consider: XVII ~ Adjusting Title 32 regarding licensed contractors to require the Registrar's Office to collect a declaration that transaction taxes were paid by the contractor. It could become a component ofthe existing biennial licensing process. (Recommendation 13B) ISSUE 14- TO WHAT EXTENT DOES THE REGISTRAR OF CONTRACTORS OFFICE CHECK CONTRACTOR BACKGROUNDS? See pages 71 - 75. The current background-checking process is not thorough and this can leave homeowners in an exposed and vulnerable position. Residential contactors have enormous access to items of value when working on homes and they work near children and other vulnerable individuals. We found: • Statutes do not require and the ROC does not perform adequate background checks. Background checks are only performed as a follow-up process on certain applicant provided information. • Applicants are on their honor to truthfully complete applications, but the ROC does not audit applications unless given a tip or otherwise becoming suspicious. The application asks contractors to disclose felony convictions. They need not disclose misdemeanors, civil lawsuits or bankruptcies, so the contractor is not required to reveal misdemeanor convictions relating to personal violence, misconduct involving a deadly weapon as provided in section 13-3102, dishonesty or fraud, arson, theft, domestic violence, narcotics (Arizona Revised Statutes Title 13, Chapter 34, or similar) or sexual misconduct. • Fingerprint cards are not required as they are for numerous other professions. However, the Registrar's Office can decide to fingerprint any applicant if they detect problems like multiple drivers licenses. • Contractors are not required to reveal past or current litigation or bankruptcies. • The Registrar of Contractors does not require a credit check of contractors. • Eighteen states run credit checks or ask contractors to financially document they are financially viable to be in business as a licensed contractor. Florida, Utah and California are all examples of states having stronger applications than Arizona. • There is not a national database for contractors similar to what exists for real estate appraisers, nurses, doctors and behavior therapists. • Accurate and current mailing addresses for contractors are critical, yet the ROC database does not reflect the status of contractor addresses. The ROC might have discovered a contractor's address is undeliverable, but they do not reveal this on their database. The Registrar's Office should: ~ Improve their vetting process for contractors. Their background checks should be more thorough and ask more questions like the Utah and Florida contractor applications or the ArIzona Department of Insurance application. The applications and biennial renewal forms should require contractors to disclose, excepting vehicular matters, whether the contractor was ever convicted of a misdemeanor or felony in any state. Contractors answering "yes" should be required to provide the subject matter, date, court and sentence. (Recommendation 14A) XVIII The Legislature should consider: }o> Developing legislation to require contractors be fingerprinted with their initial application. Realtors, teachers and others in a position of trust are required to have fingerprint clearance. Contractors have access to homes and work near children and other vulnerable persons. (Recommendation 14B) }o> Developing legislation to require contractors to provide, as a component of their application or biennial license renewal a summary of past and current litigation including case number, date, courts, all parties, subject matter and disposition. Contractors should be asked if all judgments, liens or taxes were paid as required. The Utah application and a number of other Arizona agency applications (e.g., Medical Board, Securities, Gaming, Liquor and Real Estate) ask applicants to provide information about judicial actions involving themselves. (Recommendation 14C) }o> Adjusting Title 32 concerning licensed contractors to require contractors to biennially report their known place of business, their statutory agent and answer the question, "Is the address/known place of business information identical to the similar Corporation Commission or Secretary of State record?" Additionally, these adjustments to Title 32 relating to business addresses should require the ROC to post undeliverable business and statutory agent address information on the ROC contractor web database upon receipt from the Corporation Commission or Secretary of State. The ROC should promptly test undeliverable address information they receive from other sources (via a notice letter). Upon confirming the address is undeliverable, the ROC should post the information to their web database. (Recommendation 14D) ISSUE 15- WHAT IS THE SCOPE OF DISCIPLINE AFFECTING A CONTRACTOR'S REMAINING LICENSES ONCE HE HAS ONE LICENSE SUSPENDED OR REVOKED? See pages 75 - 78. We found: • When a contractor is under an administrative suspension, they are not supposed to perform any contracting duties until they fix the administrative problem that led to the suspension, yet some contractors ignore this rule. • In workmanship situations where the ROC has already suspended or revoked one license, then the Registrar must gather the contractor's other licenses and go through a second process to determine the fate of the remaining licenses. There. currently are no mechanisms to automatically cancel remaining contracting licenses possessed by the contractor if one of his licenses is revoked. Instead, Registrar staff or complainants must initiate another complaint after the original suspension or revocation order. It is only at that time the other licenses are gathered and called into question. • The ROC cannot take away a license automati~ally from a contractor if they issue it in error. If they issue a license in error, the Registrar must go through the due process routine to revoke the license that should not have been issued in the first place. • The current process to revoke multiple licenses takes too long. Revoking the second set of licenses requires a second due process run. So this greatly extends the time that problem contractors are allowed to operate and solicit work. In so doing, it exposes the public to risk. XIX • Contractors can request new licenses subsequent to a homeowner(s) filing an official complaint. Nothing in current statute prohibits the ROC from issuing a new license while the old one is under question. The Legislature should consider: )l- Developing legislation prohibiting the issuance of new licenses to contractors while they have open complaints. Instead, legislators could create a new category of contingent or provisional licenses. (Recommendation 15A) )l- Developing legislation authorizing the Registrar to revoke remaining licenses or rescind places where the contractor is listed as a qualifying party simultaneously in instances when the Registrar orders the revocation of one of the contractor's licenses. The initial hearings, findings and order should address the contractors other licenses and listings as a qualified party so as to avoid the redundancy required with the existing system. The scope of discipline affecting a contractors' remaining licenses should be declared and debated in the original charges and hearing process. A completely new set of hearings should not be necessary. (Recommendation 15B) ISSUE 16- TO WHAT DEGREE ARE GENERAL CONTRACTORS REQUIRED TO VERIFY WHETHER A SUB-CONTRACTOR HAS A LICENSE IN GOOD STANDING WITH THE REGISTRAR OF CONTRACTORS? See pages 78 - 79. Contractors may hire licensed or unlicensed individuals to work for them. However, contractors must use a licensed sub-contractor when the task requires licensure. Unlicensed employees improperly engage in work requiring construction licensure typically for one ofthree reasons. 1. They lie to general contractors about their license status. 2. They do not realize the task requires licensure. 3. They and the general contractor knowingly break the law. We found that lax documentation practices contribute to the problem. • Sub-contractors are not required to offer any proof oftheir licensure to general contractors. • This makes it hard for the Registrar's Office to punish general contractors who knowingly have unlicensed workers performing work which requires a license. Sloppy general contractors avoid punishment by saying, "I didn't know the sub was not licensed." • Additionally, there is no requirement to license construction job superintendents. • Homeowners say these regulations create an unfair situation because they are held to a higher standard than licensed contractors are. The ROC makes homeowners verify their replacement workers have appropriate contractor licenses to perform particular tasks. Without this verification, the ROC disqualifies the workers' bills from fund reparation. The same standard is not applied to general contractors because they do not have to use licensed job superintendents, they do not have to check whether their sub-contractors are licensed, they can use handymen and day laborers and they can count their own work. Homeowners cannot do any ofthese things. • A.R.S. §32-1121 relates to handymen restrictions and it trips up many people. The law has a provision stipulating the total construction cost cannot exceed $1,000 if one uses a handyman. xx The Legislature should consider: )I. Developing legislation to require contractors to obtain the license number and initially verify the good status of each sub-contractor they use. In turn, sub-contractors should then be required to deliver notice of any change of license status to the general contractors they work for within thirty days of any change. (Recommendation 16A) )I. Revise the statute relating to handymen. A.R.S. §32-1121 places a $1,000 limit on the total repair cost of a job, not just a $1,000 limit on what work can be done by a handyman. It does not apply to contractors, only homeowners. Thus, an inequity occurs. A handyman should be allowed to perform up to a $1,000 in labor which does not require licensure. The total job cost should not be tied to the handyman. (Recommendation 16B) )I. Requiring site superintendents be licensed. This requirement will require the creation of a new category oflicense. (Recommendation 16C) ISSUE 17- IS IT PROPER FOR THE REGISTRAR TO ENCOURAGE COMPLAINANTS TO PURSUE CASES ON THEIR OWN WITHOUT THE BENEFIT OF LEGAL COUNSEL? See pages 79 - 82. Parties represented by attorneys fend better at the Office ofAdministrative Hearings. • Both homeowner and contractors fared better when they used attorneys according to a survey of cases performed by the Director ofthe Office ofAdministrative Hearings. • In this case, complainants watched two of the early cases fail and attributed it to the owners representing themselves without an attorney. Families in latter cases got attorneys and they won. • The owners complained they got bad advice when told they could represent themselves in administrative hearings. They said ROC staff and materials are indifferent and imply attorneys are not necessary. While it is factually true attorneys are not required, citizens said it gave them the wrong impression. They expected conversational meetings where they could just say their story and show their documents, but instead got a hard-edged, legalistic, unforgiving process that intimidated them. Once they experienced actual hearings, the citizens felt the ROC failed to prepare them. Owners thought the ROC should advise citizens that because the two agencies' systems are so complicated, parties tend to fare better with an attorney. • The Registrar said, "It is wholly inappropriate to advise the parties that they should use an attorney." The Registrar's Office should: )I. The Registrar's Office should change their oral instructions, pamphlets and web site information so they note that parties who utilize a lawyer in contested cases usually improve their position. The instructions could then state a party/layman may represent himself, if he cannot afford an attorney. (Recommendation 17) XXI Ombudsman Office - Citizens' Aide Final Report of Investigation· Registrar of Contractors Case #20062692 December 12, 2008 Final Report ofInvestigation Case # 20062692 December 12, 2008 Registrar of Contractors SUMMARY Nine homeowners contacted us upon deciding the Registrar of Contractor's system was failing them. The homeowners became involved in the Registrar's process when they filed complaints against a dual-licensed contractor. Some of the complainant homeowners initially filed with the Registrar's Office, others with the Superior Court and some filed at both locations. Each owner desired financial recovery via the Residential Recovery Fund. Access to the Recovery Fund is dictated by statutory constraints and controlled by the Registrar's Office. Homeowners in both the administrative and the civil court processes felt the Registrar of Contractors Office seemed indifferent about the length of time and difficulty of their process. Owners and contractors both complain to the Ombudsman Office that the Registrar's Office process takes too long. Most of the twenty-five homeowners upset with the contractor in question filed their complaints with the Registrar in the spring or summer of 2006. After about two years, these complaint cases had gone through most of the system and were closed. Twenty-three of the complaints resulted in discipline while two complaints settled or withdrew. Eight homeowners recovered money from the Recovery Fund to compensate or partially compensate them for their loss. The Registrar's Office reported on April 16, 2008, that the Attorney General's Office would likely approve the ninth claim for the remaining monies ($24,359.66). At that point, the Registrar will close the fund because it will be at its limit. Seven deserving homeowners, with a total of $96,515 in unrecoverable awards, will go away empty-handed despite proving the contractor's guilt. ALLEGATION The complainants alleged the Registrar of Contractors processed the complicated Recovery Fund complaints in an untimely manner. OVERVIEW The complainants were overwhelmingly upset at how long the process takes. Many became embroiled in the dispute with the subject contractor in the previous year or even the year before that. They said they alerted the Registrar's Office months earlier to the contractor's bad acts, but a continuous stream of new people were victimized as the Registrar's Office plodded through their long process. Complainants stated that they had no idea the Registrar's complaint process would drag on for so long. 1 We worked with the Registrar's office to determine a total case time estimate for typical administrative and court complaints. [See Exhibits A and B]. We determined that on average, the administrative process at the ROC takes over 538 days and the ROC portion of the court process takes approximately 178 days, with 123 days occurring subsequent to the initial court action. Consistently the vast majorities of contractors' licenses (slightly over 90%) are highly regarded and are not involved in the complaint process. These licensees pride themselves on quality workmanship and good customer service. Regrettably, there are a still a significant number of contractors who receive a complaint. The Registrar of Contractors received 11,867 complaints in FYO? against 5,679 different licensees. In FY06, 11,974 complaints were received. About one-third of the complaints coming into the ROC are serious complaints requiring adjudication. Most of these serious complainants seek reparation from the Recovery Fund. The remaining two-thirds of the complaints are addressed relatively quickly because they are less complex. Typically, less complex complaints are fixed or resolved prior to hearings, not substantiated by the ROC, or the homeowner declines to continue. In 2007, there were about 4000 or so serious complaints. About 2,700 (67%) resulted in an administrative hearing while the remaining 33% went into default (uncontested). The ROC reports that each year, about 3% ofthe contractors in Arizona are suspended or revoked. Serious complaints must adhere to the lengthy course of action laid out in statute and rules. It may take years to wind through the Registrar's system, as there is no expedited procedure. When contractors fail to fix a problem, or otherwise fail to adhere to statutes or rules, they become subject to penalty assignments including license suspensions or revocations; bond forfeiture; the assessment of statutory penalties and/or Recovery Fund debt assignments. However, getting to the point where a contractor is actually subject to a penalty is the rub. This investigation will focus on the troubles created by such a long, complicated process. BACKGROUND The Arizona Registrar of Contractors (ROC) was established in 1931 by the Arizona State Legislature to serve as the regulatory body over contactors. The Registrar issues licenses, inspects for quality of workmanship and investigates complaints of statutory violations by contractors. Currently, the ROC oversees 238 specific license classifications within the three categories of commercial, residential, and dual licenses. The ROC is a 90/1 0 self-funded agency, with 90 percent of the license fees reserved for agency operations and the remaining 10 percent deposited into the State General Fund. Its mission is, "To promote quality construction through a licensing and regulatory system to protect the health, safety and welfare ofthe public." [Strategic Plan, 2008 to 2012.] 2 The Registrar of Contractors maintains the official record listing such things as the name, address and type of license for each licensed contractor in Arizona. They gather and disseminate histories of complaints against licensed contractors and administer the Recovery Fund to reimburse financially harmed homeowners. The ROC also may issue orders to "cease and desist" and impose civil penalties against persons who engage in contracting without a license. The Arizona Republic noted in a June 1, 2007 article that Arizona is one of 35 states that licenses or registers contractors. Most of these states belong to the National Association of State Contractor Licensing Agencies (NASCLA). Only 14 [AL, AZ, CT, FL, HI, IN, MA, .MD, MI, MN, NV, NC, UT, VA] have variations of recoveryihome improvement guarantee funds. Each fund is different and has its own unique benefits and limitations. In Arizona, the Recovery Fund is exclusively for homeowners (owner-occupied residences). Arizona homeowners have two courses of action available to them if they become embroiled in a dispute with a contractor regarding defective construction. Subject to statutory time constraints, they may file a complaint at the Registrar of Contractors or file a civil lawsuit in court alleging warranty breach, contract breach or tort negligence. If they want, homeowners can pursue both courses of action. Either method can lead to a Recovery Fund distribution. The Fund's revenues come mainly from annual fees paid by residential contractors. All residential contractors are required to participate in the Fund unless they can establish they are able to maintain financial resources amounting to at least $200,000. Only a few contractors opt for the financial resource route. Money for the fund is collected primarily in the form of an assessment, which cannot exceed $600 per biennial license period, paid by each residential contractor. The ROC is also required to file an annual statement of financial condition of the Fund with the Department of Insurance. The Fund had a balance at the end of FY 2005-2006 of $10.5 million and a balance at the end ofFY 2006-2007 of$11.9 million. History of Payouts from the Fund FY 2003-2004 $5.5 million FY 2004-2005 $5.8 million FY 2005-2006 $4.1 million FY 2006-2007 $6.2 million The Registrar's Office considers the Recovery Fund healthy and well funded. The Registrar's staff said that a few years ago they lowered the Recovery Fund assessment they collected from each contractor because the fund seemed larger than what was needed to cover claims. Claims against contractors must be filed within a two-year statute of limitations period. From that point forward, the process usually takes well over a year or more before a homeowner 3 may succeed and get a Recovery Fund disbursement. The current administrative process is taking approximately 535 days in straightforward cases where there are not appeals, rehearings, settlements or extraordinary delays. The current court process (in conjunction with the Registrar's Office) is taking approximately 123 days at the ROC subsequent to a court case decision for the plaintiff for straightforward cases. The preceding court process may vary in time from a few months to over a year. RESEARCH We interviewed the complainants and eight of the Registrar's staff. In order to benchmark nationally, we interviewed staff from the National Association of State Contractor Licensing Agencies (NASCLA) and looked at statistical information on the Nationalcontractors.com web site. To benchmark particular activities across agencies, we also interviewed staff from the Industrial Commission; Motor Vehicle Department; the Board of Technical Registration; the Department of Building, Fire & Life Safety, Medical Board; Nursing Board; Dental Board; Chiropractic Board and the Office of Administrative Hearings. We reviewed Arizona Revised Statutes, Title 32 and Title 41 and the Arizona Administrative Code rules applicable to the Registrar of Contractors and the Office of Administrative Hearings. We examined the Registrar's complaint process flow and times. We compared the two routes to the Recovery Fund (Administratively through the Registrar Office and via court). We looked at the individual cases and examined how they fit into each process. We read the most recent Auditor General Report, the Registrar's Strategic Plan for 2007 and their newer Strategic Plan 2008 through 2012. We read the "Concept of Operations" for the Arizona Registrar of Contractors relating to the proposed ROC Information Management System (ROCIMS) by Data Site Consortium, Incorporated. We read the related Project Investment Justification and Summary for the ROCIMS computer project prepared by the ROC. We examined how other states in the United States handle residential contractor complaints. We gathered relevant facts, such as: 1. The total number of active contractor licenses, 2. Number of complaints against licensed contractors, 3. Total complaints closed through compliance, 4. Number of cases resulting in a citation for hearing, 5. Total number ofdisciplinary license revocations and suspensions, 6. Total number ofdisciplinary penalties, 7. Recovery Fund claims received, 8. Recovery Fund claims paid out, and 9. Length of time it took if one successfully pursued a Recovery Fund claim (from initial complaint to payout) in the administrative or the court process. 10. How the ROC measures their service and performance. 4 ISSUE 1 - - DOES THE RECOVERY FUND SYSTEM TAKE TOO LONG? We looked at contested complaints on their journey through the system to the Recovery Fund. Created in 1981, the Recovery Fund covers claims against licensed contractors made by owner-occupied residential homeowners. The Legislature established the Fund to assist consumers who suffer financial loss due to the actions of a licensed residential contractor. The Fund can compensate a homeowner injured by an act, a representation, a transaction or the conduct of a residential contractor. Consumers can recover actual damages they suffered up to 2 years after the loss occurred. As exhibits A and B convey, the process is involved. Two titles in the Arizona Revised Statutes corne into play. A.R.S. Title 32, Chapter 10 specifically relates to statutes regarding contracting laws while Title 41 regards statutes relating to State Government including the administrative hearing process utilized by the Registrar's Office. In brief, the current process is as follows: When a homeowner files a complaint with the Registrar of Contractors, initially the Registrar's Office urges the contractor and the homeowner to attempt to resolve the dispute informally. If the parties do not work out their differences, then an inspector sets up an inspection. In the inspection notice, the ROC tells the contractor the homeowner is not happy and assigns an inspection date. About 8 weeks later, inspectors for the Registrar's Office inspect the subject property. If the inspector substantiates problerns, he has two to three weeks to write and issue a corrective work order. The work order directs the contractor to make listed corrections and gives the contractor a minimum of 15 days to remedy the deficiencies. The homeowner cannot bar the contractor from the property during this period. The homeowner must continue to press the Registrar to remain active and pursue the contractor over the items listed in the corrective work order; otherwise, the ROC will close the case. If the contractor fails to fix the problems or if the homeowner remains otherwise unsatisfied, then the homeowner must request the Registrar's Office issue a citation. The Registrar's office then notifies both parties with a formal notice. The Registrar's Office must then schedule a hearing with the Office of Administrative Hearings. It occurs about three months later. Within twenty days of the hearing, the administrative law judge issues his findings and recommendations to the Registrar. If the Registrar of Contractors reviews these findings and concludes a contractor is guilty of violating contracting laws [contained in Arizona Revised Statutes Title 32 and the Arizona Administrative Code R4-9-101 through R4-9-131], then the Registrar may issue orders subjecting the contractor to various forms of discipline. A contractor could have their license suspended or revoked, be issued a penalty for certain statutory violations, lose their bond, incur a Recovery Fund judgment assessment against them or a combination of these things can be imposed. If the goal is to get reparations from the Recovery Fund, the homeowner must then take either their winning judgment from court or their Registrar order of suspension or revocation and submit a request to the ROC documenting how much they wish to claim. 6 This claim amount is then subject to a second round ofhearings. The Recovery Fund staff are told what amount was determined in the hearing and they start the check request process. About twenty days later, the owner gets a check. While the contested process outlined above might not sound too complicated, in practice it usually takes over a year to complete and requires the active and steadfast determination of the complainant. Thus, it might be over a year or more before a wronged homeowner can prevail and actually receive a Recovery Fund award from the Registrar ofContractors. To arrive at these numbers, we looked at how long it takes to get a Recovery Fund award via the two means one may use to get an award --- through the administrative process and/or through the civil court process. We asked the Registrar's Office if they had a flow chart, matrix or other means of describing their process. Only a simplistic five-step matrix was on the Registrar's web site. The Registrar said that detailed diagrams of their process were in development. Their goal was to expedite the system in the near future. They planned to use the new diagrams as tools to help them identify ways to expedite the system. Even though a year has passed, we never received the diagrams. Because there was no comprehensive pre-existing diagram or flow chart listing the components of a typical complaint progressing through the system, and we were not given anything from the Registrar's development team, we created our own. With the assistance of Registrar of Contractor staff, we documented sixty-six possible components in the administrative process [Exhibit A and Timeframe A] and over thirty-three components in the Registrar of Contractor's segment ofthe court process [Exhibit Band Timeframe B]. We applied current timeframes to the two processes based on estimates provided by the Registrar's staff. We based the scenario estimates on an optimistic, straightforward process without early defaults, re-hearings, appeals, settlements or extraordinary delays. We determined it could take a homeowner approximately 545 days to navigate the Registrar's complete administrative process and approximately 123 days to navigate the Registrar's segment of the court process, subsequent to the court's initial judgment, in order to collect from the Recovery Fund. This investigation examined cases that ran the complete continuum of the system, not cases which settled early. The homeowners represented in this investigation each had cases in which the contractor refused to correct deficiencies, yet disputed the complaint and demanded his complete due process rights. In the few instances where the contractor admitted guilt and asked to settle, he ended up defaulting. When the settlements failed to last, the impacted homeowners had to rejoin the complaint process by asking the Registrar's Office to reopen their complaints. Timeframes We separated the time component into two segments for each of the two processes. We asked how long the overall process takes to move through court or move through the administrative route if one is successful in getting a Recovery Fund payout. In other words, how many days 7 would typically lapse from the time a complainant files a complaint, to the day they get a check from the Fund? We knew both processes usually require two hearings. So we also wanted to know a subset of the first question, namely, what was the length of time between the first hearing and the final payout? In other words, once there was an initial judgment determination by the court or a revocation/suspension by the Registrar in the administrative process, how long would it be before a homeowner got reparation? The timeframe for the two processes For the first segment, we extensively interviewed the Registrar's division leaders and developed both narrative and numerical exhibits designed to illustrate the steps within the two processes and their time estimates. Exhibit A is a narrative of the Administrative route. We documented 66 distinctive components in the administrative process. This translates numerically into a 43-step process. Exhibit A1 documents a typical timeframe and shows how this can take 545 days even if no judicial reviews or other appeals are required. Should additional hearings be required, each one might take months to get on a civil court or Office of Administrative Hearing calendar. We estimated that an administrative case could theoretically drag out over 1,100 days beyond the typical timeframe if a party dragged out meetings, contested everything possible and got a hearing or appeal at every given opportunity. Such an excruciating case could last 1,645 days (545 + 1,100 = 1,645). Exhibit B is a narrative of the civil court route to the Recovery Fund. We documented 33 typical components in the civil court process leading to the Recovery Fund. This translates numerically into a 29-step process. Exhibit B1 documents a typical timeframe and shows how this translates numerically into 178 days of interaction with the Registrar of Contractors Office. This amount equates to 55 days of likely interaction with the ROC, concurrent with court time, followed by an additional 123 days after the case is won in court. It does not count appeals. Should additional hearings be required, each one usually takes months to get on a civil court calendar. The process from the point of judgment forward We then honed in on the final segment of the process. We asked how long it typically takes a complainant to receive payment from the Recovery Fund once the homeowner wins a judgment in Superior Court or obtains a final disciplinary order of suspension or revocation from the Registrar. The staff reported that in FY06, the actual time range ran between 135 and 195 days and had an average of 156 days. In FY07, it took longer. The average was 180 days. It is important to remember this time runs after the plaintiff gets through the court process or after they obtain an official order from the Registrar in the administrative process. Court action can take anywhere from a couple of months to a couple of years. The staff said it also depends on how fast homeowners submit their judgment to the Registrar of 8 Contractors. If a homeowner fails to notify the Registrar's Office at the beginning, when the homeowner commences action for a judgment in civil court, there is no formal penalty. However, in that case, it delays the claim because the Registrar's Office must still verify the items and document their findings. Exhibit AI, the administrative process, shows that if the Registrar's Office took all the time they allocate, then it would not be unusual for 249 days to elapse from the date a contractor's order of suspension! revocation is effective to the date ofRecovery Fund payout [#39 through #66]. Exhibit BI, the civil process, shows approximately 123 days elapse from the date the ROC receives a judgment from a court judge until the date of payout from the Fund [#9 through #33]. These numbers do not reflect the time actually spent in court, but only the time spent in the Recovery Fund line. Appeals or other court actions subsequent to the original judgment are not controlled by the Registrar's Office and could take an indeterminate amount oftime. Complainants'View The homeowners think the process takes too long if one desires Recovery Fund reparation. They said ROC inspections took a ridiculously long time to schedule and were subject to rescheduling delays. It was not unusual to wait for over two months for an inspection. They also were upset that administrative hearings took months to schedule or re-schedule. Registrar of Contractors View The Registrar's office does not actively keep track specifically how long cases take from beginning to end. They do track time within segments of their process. The ROC staff noted that some very lengthy cases are due to the mutual agreement of the contractor and the homeowner and are not the result of undue discord. The ROC staff gave the example of the homeowner wanting a particular material used in a repair job. They said it might take months to receive the order. This delay is not held against either party as long as the material is selected and ordered promptly. The Registrar staff conceded that the contested process takes a long time. They say it frustrates them too, but they pointed out this is largely because due process requirements impose duties on them. The Registrar's Office said they must allow the parties to contest issues and give time for responses. They noted it also takes about three months to fit a case into the Office of Administrative Hearings schedule, it takes about eight weeks to schedule property inspections and then more time to perform their legal reviews. The Registrar staff said their obsolete computer system causes numerous inefficiencies for both staff and the public. The Registrar of Contractors said they recently received permission to update their computer. They provided us with a copy of their Project and Investment Justification (PIJ). Their proposed new information management system is called Registrar of Contractor Information Management System (ROCIMS). The PIJ for ROCIMS stated, 9 "Current agency procedures for issuing and renewing licenses, investigating complaints, and providing financial reimbursement through the Recovery Fund are labor-intensive and lengthy in duration." The Registrar's staff places much of the blame for these problems on their current 30-year-old information technology (IT) and communication systems. They say the system is overly reliant on individualized Microsoft Word and Excel software instead of integrated computer systems. Findings for Issue 1 Finding lA The Registrar's Office process takes too long. The lengthy process frustrates homeowners, contractors and even the Registrar's staff. It is not reasonable to expect a homeowner to wait over a year to fix his house, nor should an innocent contractor have to spend over a year trying to clear his name. No matter which of the two processes (administrative or judicial) is used, parties are looking ata complaint-topay- off-timeframe that typically runs in excess of a year. Complaints having re-hearings, appeals, settlements or extraordinary delays could stretch on an additional year or so longer. Segments within the process clearly take too long. The final two segments (from conclusive findings of guilt, to determination ofrecovery fund amounts, to the payoff date) exemplify the problem. The administrative route runs approximately 249 days for these final segments, while the court route typically runs about 123 days. Finding IB The current process, whether by court or via the administrative hearing route, typically requires two hearings and this significantly delays the process. The administrative route has one hearing to determine guilt and discipline (e.g., suspension or revocation). It has another to determine the Recovery Fund amount. The judicial route to the Recovery Fund requires homeowners to make two trips to Court. In the first, they have their original case heard. Should they prevail in court, then the homeowner must take their winning judgment to the Registrar's Office. The Registrar then requires the homeowner to state a desired Recovery Fund amount. An amount might already be listed in the original order, but no matter, the homeowner must go through the exercise. The homeowner determines the amount and files a twenty-day (minimum) notice to say he intends to go back to court and get the judge to "direct payment." The homeowner must wait for a minimum oftwenty days and then they can go back to court and request the judge direct the Registrar to pay the homeowner from the Recovery Fund. This second round at Court or at administrative hearing seems to be a time-consuming, unnecessary complication. It would seem more efficient and logical that the Recovery Fund amount be determined as a component of the original court action or alternatively as an original component of first administrative hearing and subsequent order. 10 Additionally, the Registrar's Office has no formal process to expedite payment out of the Recovery Fund, even jf a Court has already established guilt. The current period of approximately 123 days is excessive. Minnesota developed a quicker way to access their recovery funds. It has a statutory process (see Minn. Stat. §326-975) to speed up their recovery fund payment procedure. Minnesota homeowners must apply if they wish to be considered for accelerated payment out of the contractor recovery fund. Finding Ie Another source of delay is the length of time it takes to schedule a property inspection. ROC inspectors say labor constraints mean it takes about eight weeks before they can find the time to visit a property. It then takes the inspectors approximately twenty or more days to write and disseminate their report findings. Private sector appraisers tend to inspect and write up mortgage appraisal inspections in two to five days. Finding ID The Registrar's Legal Section has too many cases to handle, given their staff allotment. Last year, the section worked about 3,500 cases. The majority of these cases involved the Recovery Fund, which meant the section frequently had to arrange two or more hearings for each case and issue an equal amount oforders. Finding IE Another major source of delay is the Office of Administrative Hearings (OAH). The Office of Administrative Hearings director, CliffVanell, reported that, "In FY 2006, 95% of all ROC cases were scheduled for hearing by the 1lOth day from the date the Registrar of Contractors requested that a hearing be set:' By a large margin, the ROC is the Hearing Office's biggest customer. In order to achieve a reduction down to 90 days, the Office of Administrative Hearings recommended the addition of a .5 Administrative Law Judge to hear ROC cases, and the full implementation ofvideoconferencing. Finding IF The Registrar's computer system slows the process. The ROC is aware the current computer system is deeply flawed and too slow. They know this adversely affects the system participants. To address the problem, they created the Registrar of Contractor Information Management System (ROCIMS) project. If delivered as described in the December 2006 Project Investment Justification, this project will do much to address timeliness issues of the Registrar's Office. Citizens can expect to see more self-serve information; more complete and timely contractor status information (available prior to entering agreements with contractors); faster receipt and tracking of consumer complaints; enhanced tracking of investigative matters; improved adjudication processes and Recovery Fund release of monies. Simultaneously, ROC staff will enjoy reduced data entry and the reduction of other manual activities. Finding IG The Registrar's Office has no performance measure to track their complaint system's duration from beginning to end. 11 When we asked staff how long the process took, they instead reported how long a complaint took while in a particular area, not how long it had been in the overall process. They did not track complaints from the date a homeowner files a complaint to the day the Recovery Fund mails a check to the victorious homeowner. Thus, they do not have a performance measure counting the number of total days it takes to completely handle a complaint. Such a measure would be critical to assessing problem areas and reducing processing time. We found that under the current process, the administrative system typically takes 545 days or more and the court system route takes 178 days or more. Finding IH The ROC's Corrective Work Order and the Citation are largely redundant to one another and having both notices lengthens the process. Both notices inform contractors in writing that ROC inspectors have received a complaint. Both notices say that failure of the contractor to correct items within a reasonable amount of time (typically 15 days) may result in the ROC imposing penalties. Recommendations for Issue 1 Recommendation IA The Registrar's administrative processes for complaints need to be reduced. The current process takes too long. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the administrative system and suggest further refinements. The Registrar's Office should participate in the evaluation too. Recommendation 18 The legislature should consider amending statutes so construction cases contested administratively via the Registrar of Contractors and the Office of Administrative Hearings should have the recovery fund claim stipulated in the original case determination and order. This would eliminate the current, time-consuming exercise requiring two proceedings. Under such a scenario, complainants would request a specific Recovery Fund amount when they file their complaint. Subsequently, ifROC inspectors verified the complaint, the inspectors would issue corrective work orders stipulating not only what needs to be fixed/accomplished, but also their evaluation of the claim amount. Contractors would still have their due process rights because they could challenge the claim in the main hearing as to both responsibility and amount. Recommendation 1C The Legislature should consider amending statutes so construction cases contested in court have the recovery fund claim stipulated in the original case determination and order. This would eliminate a time-consuming exercise requiring two court proceedings. 12 Recommendation ID The Registrar's process for Recovery Fund complaints originating in the Courts need to be reduced. The. current system takes too long. Toward this end, the legislature should consider establishing a study group comprised of complainant homeowners, plaintiff attorneys and consumer advocates along with contractors, respondent attorneys and construction industry representatives to examine the ROC process for judicial complaints and suggest ways to speed up the process. The Registrar's Office should participate in the evaluation too. Recommendation IE The Registrar's Office should develop a performance measure to track their complaint system's duration from beginning to end. It should count from the date a homeowner files a complaint to the day the Recovery Fund mails a check to the prevailing homeowner. They should also establish goals and objectives designed to reduce the overall timeframe for complaints. Recommendation IF The ROC should submit a request to the Legislature justifying an increase in full-time employees (FTEs). They should ask for legislative approval of enough staff for their agency so property inspections can occur within three weeks for regular cases and within two days when there are habitation or extreme hazard issues. Recommendation 1G The Office of Administrative Hearings (OAH) should request more administrative law judge positions from the Legislature to reduce the waiting times for hearing appointments relating to ROC cases to six weeks or less. Recommendation IH The legislature should consider amending statutes to streamline the Inspection to Citation process. The inspection notice could set an inspection date, inform the contractor about the complaint (via a copy of the actual complaint) and suggest the contractor attempt to work out the problems prior to the inspection. It could give the contractor notice that if the inspector verifies workmanship or other problems at the future inspection, then an official citation will be issued. The current process usually has three written notices at its front end - a Notice of Inspection, a Corrective Work Order and then a Citation. It would be more efficient if this three-step notice process were reduced to two. From the moment the contractor receives a notice of an inspection and copy of the complaint, they have warning where the homeowner believes the contractor erred, violated statutes or failed to adhere to workmanship rules. Contractors would have from the time ofthat notice until the inspection to "make it right." Subsequent to the inspection, the ROC inspector will issue a citation if he verifies the problems exist and finds the project does not conform to workmanship standards, rules or statutes. The contractor would have 15 days to either fix the problem to the homeowner's satisfaction or write to the Registrar and ask for a hearing to contest the findings in the citation. 13 Recommendation 11 The Legislature should consider adopting a statute, similar to Minnesota's Statute §326-975, to accelerate payment out ofthe contractor's recovery fund under certain circumstances. Recommendation IJ The Legislature should consider instructing the Joint Legislative Budget Committee (JLBC) to closely track the progress of the ROCIMS computer project to ensure it stays on course and has the necessary resources to be successfully completed. Issue 2 - Recovery Fund Requirements - - Are the Fund's limits set too low or are other Fund requirements too onerous? The Recovery Fund has many restrictions, including monetary limitations. Unlike a bond, the Recovery Fund is not subject to claims by suppliers, subcontractors, laborers or others. The fund is limited to homeowners. Compensation for damages to anyone individual cannot exceed $30,000, nor may the obligation per contractor climb past $200,000 [see Laws 2002, Chap. 179 §§1 and 5]. We researched the history of these limit settings and found the Legislature last adjusted the fund limits in 2002. The Recovery Fund is available to claimants via two paths. Using the Registrar's Administrative Process, a homeowner may submit a Recovery Fund claim once they have obtained an order finding violations and suspending or revoking the contractor's license [A.R.S. §32-1154]. Alternatively, it is also available to claimants in court systems under certain conditions. If a homeowner obtains a judgment in court and cannot collect all the damages owed, the homeowner can apply to the Recovery Fund [A.R.S. §32-1136] for partial payment. If a homeowner goes the court route and wins, then he or she is required to bring the judgment papers to the Registrar's Office. After the Registrar's Office receives the initial decision in favor of the homeowner, the homeowner's attorney must then file a 20-day notice at the ROC of the plaintiffs intent to apply to the court for an order directing payment from the Fund. In both situations, the homeowner must also submit additional material to document their expenditures and exact claim request. Currently, there is no way for a homeowner to get upfront, pre-approval for a Recovery Fund amount. Owners must wait until nearly the end of the lengthy process before the amount is set by an official order. Getting the amount "set" is very involved and frequently takes numerous submissions before ROC Recovery Fund staff agrees to a preliminary amount. Homeowners must document extensively every item they wish compensated from the Recovery Fund. They must have receipts for supplies and materials. The Registrar of Contractors Office reviews the claim amount to see if it asks for items outside or above the terms of the contract. The Registrar's Office works cases on a "first in; first out basis" (FIFO) from the time the homeowner returns a completed recovery fund 14 packet or otherwise submits Recovery Fund backup material. Unless the matter only involves escrow money issues, the Registrar schedules an inspection to look over submitted items. The inspector is required to finish his inspection, analysis and report regarding the appropriateness of a homeowners Recovery Fund claim amount within 30 days. The Registrar's inspector looks at the work and asks a number ofquestions: • Was work performed to good workmanship standards? • Were upgrades, which were not part ofthe original contract, improperly included? • If the homeowner completed work with another contractor, was it low bidder or is the documentation sufficient to show reasonable expenses? • What supplies were purchased? • Did a licensed contractor perform the work? Only actual damages are recoverable. Some items are disallowed. According to A.R.S. §321121, homeowners cannot use a handyman or unlicensed contractor unless the total job stays below one thousand dollars. Additionally, homeowners cannot recover their personal labor costs from the Fund if they do the work themselves. The Fund will not pay back homeowners who expend money on legal fees, expert witnesses or other such costs. A homeowner must shoulder the burden of all legal costs, expert witnesses, cost estimates and any pain and suffering. Legal fees from Court may be recoverable via liens and court practices, but the inspector cannot count them when determining Recovery Fund charges. The inspector cannot count late fees stipulated in the contract either. Thus, even successful claims to the Recovery Fund rarely pay a homeowner for their entire loss. Homeowners are obliged to justify their replacement contractor costs. They cannot simply hire a new contractor, but must demonstrate the contractor they hire is reasonable. The Registrar's staff establishes this by telling homeowners to get three bids for the Registrar's Office to review. The Registrar's Office then issues a letter setting a proposed Recovery Fund figure. If the homeowner and the Registrar's Office agree on the amount, then the Registrar's Office waits to see if the contractor objects. Ifno one objects, the Registrar's Office certifies the amount. If the contractor or homeowner contests the amount of the claim, or if the Registrar decides to intervene, then all three groups (homeowner, contractor, ROC staff & attorneys) will go back to court. If a Recovery Fund hearing is required, the group must again wait to get on the court or hearing office calendar. This hearing will not involve questions about the merits, but will instead center on settling the Recovery Fund amount. At the Recovery Fund hearing, a judge hears the financial issues, determines the facts, then makes the payment decision and issues a directive to payout. About three weeks later, the State Treasurer issues a check. The Recovery Fund has further limitations. As said before, homeowners may only recover a maximum of $30,000 per residence even though their losses might be greater than this limit. 15 Only actual damages are recoverable. Attorney fees, expert witness fees, upgrades not stipulated in the contract, personal injury claims or consequential damages are examples of items normally not recoverable via the Recovery Fund. Once the Recovery Fund closes to a homeowner because their claim exceeds the individual limit or total limit, the owner has little recourse. They can hire an attorney to go to court to seek a judgment to recover their unpaid losses or write off the loss. If the contractor has no assets to lien or insurance, the homeowner is simply out the money. Registrar of Contractor staff checked the fund a year ago regarding the question, "Do any complainants go away unpaid due to recovery fund limits?" In 2006, the Registrar staff reported there were only two incidents where the fund maxed-out and only one occasion where a homeowner was not paid. By 2007, the situation worsened. For example, in the case of the particular contractor involved with our complainants, seven families won their case, yet were totally cut off from the fund. We are aware of at least two additional contractors who performed equally badly in 2007. These contractors also financially injured consumers to a greater degree than the Fund's limit. Latter consumers from each of these cases will be denied access. Clearly, the worse a particular contractor is, the more likely the Recovery Fund will not be adequate to the task. The ROC staff said the fund is financially in good shape. It operates on a cash basis and is regularly audited. They said income exceeds expenses and the Fund has never been close to running out of money. They said they have authority to raise the levy on contractors if the fund runs low. The staff noted they actually cut the levy a number of years ago. Registrar of Contractor staff members do not view the fund as an insurance policy. They believe it is a "stopgap" if a contractor has no assets to lien. We also asked about the rationale behind A.R.S. §32-1136, requiring those who file in court to also file with the Registrar's Office in order to obtain access to the Recovery Fund. Registrar staff said the provision is geared toward verifying the legitimacy of recovery fund claims as dictated by statutes. Alternatives We spoke to the Department of Building, Fire and Life Safety because their agency also has a Recovery Fund for owners of manufactured homes. We compared the two funds. The Department of Building, Fire and Life Safety Recovery Fund does not have monetary limits like the ROC fund. Recovery from the fund is only limited to actual or compensatory damages, including costs, but excluding interest or attorney fees. While the Arizona Department of Building, Fire & Life Safety's experience with their fund illustrates that a recovery fund can work without artificially imposed limits, other states have not tried completely uncapped systems for their contractor recovery funds. 16 The Manufactured Housing Consumer Recovery Fund also does not have strict limits on handymen doing remedial work either. Manufactured home property owners can use unlicensed contractors as long as the particular task does not require a contractor's license. We looked at 13 other Recovery Funds around the United States. Utah is one of three states having a reciprocity agreement with Arizona. It has higher limits of $75,000 per residence and $500,000 per contractor for its recovery fund. However, Utah's fund is for lienholders, not homeowners. It only protects homeowners from sub-contractors who have not been paid by general contractors. Minnesota has set up a two-tier recovery fund system, either accelerated or standard. The accelerated procedure is available to those with claims under $7,500. Some states have found creative ways to manage multiple claims so that aggrieved homeowners do not go away empty-handed because of recovery fund limitations. Examples include North Carolina and Michigan. In North Carolina's case, once they become aware of more than one claim, they consolidate all the claims by stipulating a deadline via an Order of Consolidation. North Carolina has no limitation on their recovery fund, but they limit distributions to the amount of the award or 10% of what is in the fund, whatever is less. Homeowners not receiving their full allotment in one year can carry the remainder over to subsequent years and continue to make annual claims until they are fully paid their complete recovery fund award. Numerous states require general liability insurance instead of, or in addition to, recovery funds or surety bonds. Sometimes insurance or bonds are set according to the cost of the original construction contract. Insurance must be put in place before work is commenced or payments are made. In other cases, flat liability insurance amounts are required. Most frequently, these liability policies depend on the type of license, contractor net worth or average contractual values of the annual constructionagreements. The coverage typically ranges from $100,000 to $500,000. Complainants' View Homeowners view the structure of the Fund as too limited. They think the recovery amounts are set too low. They worry the overall $200,000 limit is too restrictive, given there is no quick way to stop or suspend a bad contractor. Theoretically, only six homeowners could get a full $30,000 and one homeowner a partial disbursement before the fund would max out. Homeowners believe the worse a contractor is, the more likely the Recovery Fund will be inadequate. They believe any offer to go to court for additional monies will be useless, given that fraudulent contractors would hide assets or maintain limited liability companies or corporations to limit their personal liabilities. Homeowners do not believe most Arizonans are aware of these limits. They said the Registrar's Office existence and mission statement lulled them into a false sense of security. They believe the Registrar's Office was created to protect and regulate the public's health, safety and welfare relating to construction. They thought this meant it would act as an 17 advocate to rectify verified construction wrongs committed by contractors. Yet, when the homeowners availed themselves of the system, they found no advocacy. Homeowners acknowledged that while due process is necessary, it need not be so piecemeal, nor should it take over a year. The owners believe the system should better allow for advocacy by the Registrar. They believe the Registrar's Office should more frequently become a party to the case. The Courts or the Office of Administrative Hearings can ensure parties get due process. They noted various Arizona commissions and boards become a party to cases. The licensees in those circumstances must maintain pre-set standards or face disciplinary proceedings. The owners think. the Registrar's mission statement is misleading because it indicates the ROC takes a more active roll than they do in practice. Owners believe the Registrar's Office is too passive and they relegate too much responsibility to homeowners. They think. the Registrar should more actively regulate construction licensees to make certain contractors adhere to construction standards and laws. Because the Registrar's Office declines to become a party in most cases, it means that whole segments of contracting law have no champions. Homeowners do not think their claim should compete with others in a race to see who will get a recovery amount before the fund limits stop further payouts. They think all wronged consumers, having actual losses, should be entitled to a recovery fund payment. They think this is only fair given that contractors are not paid via independent escrow account officers, but directly by consumers. In addition, homeowners complain the Fund requirements impose a cruel hardship when coupled with the provision stating homeowners must only hire licensed contractors. Owners complained that, in their experience, licensed contractors frequently refuse to bid on jobs when they stem from a prior dispute with another contractor and when there has been a complaint filed with the Registrar. Homeowners further complain it seems unfair that contractors can use the very handymen and unlicensed contractors that the homeowners are barred from using. Homeowners say these limitations box them into spending more money when they already face financial losses. They think their sweat equity should be allowed ifthe Registrar deems the amount claimed as reasonable. Homeowners think. the Registrar's Office has unrealistic expectations in regard to justifying Recovery Fund Claims. They tell of extreme difficulties finding alternative contractors willing to step into the midst of another contractor's faulty job. They view the restrictions on handymen as ironic and punitive. They ask, "How is a bad licensed contractor or his unskilled laborers, better than a good unlicensed handyman? Homeowners believe that many jobs do not require licensed workers to do the job, but are simply laborious tasks. Homeowners think they should be able to hire laborers for unskilled jobs such as clean up, unloading, paint preparation and minor landscaping. They note that 18 contractors hire such laborers to do these tasks and more. Additionally, they ask, "How can homeowner sweat equity be of no value if it gets the job done? They think that receipts and alternative contractor estimates should only be one means of determining a fair Recovery Fund amount. Registrar of Contractors View The Registrar's Office thinks the general structure, restrictions and Recovery Fund amounts are about right. They claim few people are rejected if they have valid claims. They note individuals may have damages exceeding the $30,000 individual limit, but they say the courts can be petitioned for additional re-dress in these circumstances. They watch the Fund and believe most people recover money once their Recovery Fund claim is approved. The Registrar of Contractors supported an increase to the Fund limitation amounts in 2002. The Registrar's Office said they would frequently close a case if the homeowner stops pushing the case forward. The office said it is a "complaint-driven system." Therefore, if a homeowner stops complaining, the ROC will commonly close the case. This is true even if the ROC inspector has already confirmed the contractor failed in some manner. The Registrar's Office acknowledges, "Current agency procedures for issuing and renewing licenses, investigating complaints and providing financial reimbursement through the Recovery Fund are labor-intensive and lengthy in duration." (Project and Investment Justification, Registrar ofContractors Information Management System, Dec. 2006.) The Registrar's Office does not want handymen or homeowners to be paid for labor to fix an errant contractor's work. They believe it best to keep the current requirement that a licensed contractor fix another contractor's work. The Registrar's staff said they tend to be impartial and gear their system toward ensuring due process to all parties in a case, but they infrequently become parties to a case themselves. Findings for Issue 2 Finding2A The Registrar of Contractors Recovery Fund's $30,000 individual and $200,000 total monetary limits are too low. The Fund limits were last increased in 2002. However, the value of residential real estate and the cost of building in Arizona have dramatically risen in the past five years. In many cities, single-family home prices more than doubled since 2002 [ArizonaReaIEstateNotebook.com]. Simultaneously, complaints against contractors have risen. Naturally, this means potential losses for homeowners utilizing contractor services likewise escalated. Logically, potential damage awards should rise to compensate for the increased potential losses. 19 Finding2B Low limits mean that some wronged consumers are likely to go away emp |